Explanation of Real Estate Owned (Foreclosure)
and Lender-Mediated (Short Sale) Properties
A foreclosure is the forced sale of real estate to pay off a loan on which the owner of the property has defaulted. The seller of a foreclosed property is the bank/lender, so you will be working with a bureaucracy not a home/property owner. A home that has been foreclosed upon and has been taken back by the bank/lender is called an REO (Real Estate Owned) property. If the property is a home, it has typically sat vacant for many months by the time the property is first listed. If the home is listed in the winter, it is usually winterized to protect the property. When the property is listed, the lender has already prepared for the sale and completed the appraisals needed to establish the list price. The purchase price accepted by the lender is determined by the number of offers received and the lender’s motivation.
A short sale occurs when an owner can not sell their property for enough to cover the mortgage(s). Home owners are usually still living in the property. In a successful short sale, the lender agrees to sell the property for a discounted payoff. There may be two lenders involved in the short sale- both lenders have to agree to the discounted payoff. Once your offer is accepted by the seller, the lender(s) must perform appraisals and determine if their investors will agree to take a loss. This process can take months.
Once the home owner signs the purchase agreement, the offer is contingent upon bank approval and any future offers will be considered back-up offers. The closing success rate of a short sale is much less than an REO, as the lender(s) may decline all offers and allow the home to go into foreclosure. The number of lenders (and which lender) affects the potential success of the short sale. The more lenders involved the less likely it is to succeed. The home owner’s hardship also plays a large role.
Please note: acceptance of the offer by the lender(s) is only the first step; other lien holders may not approve the sale or may request to be paid in full at the closing. It is imperative to ask if there are other lien holders, in addition to the mortgage lender(s). For example, townhome associations are not likely to forego their lien against a property for unpaid dues/assessments. They usually require the outstanding dues/assessments be paid at closing; and the lender may not be willing to cover them.
Patience is the key to working with lender mediated properties. Please prepare yourself for long delays as: No Patience = No Short Sale. A majority of the lenders are located outside the state of Minnesota. Different time zones, the number of bank departments involved, and numerous systems can slow down the process. If you are a buyer looking for a specific closing date, purchasing an REO or a short sale may not be the best option for you. Lenders prefer to work with buyers who have a flexible time frame. Please keep in mind, many lender-mediated properties are in a distressed state (but some are still in good condition). Hopefully you will find the opportunity to get a decent property at a competitive price.
As a buyer’s agent, I will provide you with all the information I am aware of, to protect your interests and to ensure a successful purchase. However, every transaction presents new challenges and issues that support the fact that purchasing a lender mediated property comes with risks- ones we can not completely prepare for or avoid. You need to be comfortable with the uncertainty and the risks involved, including but not limited to the Sheriff’s Sale and redemption timelines.
Considerations in Purchasing REO and Lender-Mediated Properties
- These types of homes are listed and sold based on their current market value, given the condition and other factors used to determine its value.
- Properties may be in grave disrepair and may be challenging to view or even dangerous.
- Most lenders require the use of their purchase agreement instead of the standard Minnesota-approved forms. The purchase agreement provided by the listing agent (in MLS) may not be the purchase agreement required by the bank, so we may have to complete two agreements. The lender may also have some additional addendums that you will have to sign. These addendums are written to protect the lender. Because these documents can be filled with unfamiliar contract terms and are not standard to Minnesota, they may complicate the offer to purchase – thus you may want to seek the advice of a real estate attorney.
- Once an offer is written, offer response time varies. It can range from 1-10 days for an REO. Short sales generally take 2-3 months or more. You may or may not have the right to revise or withdraw your offer to purchase during the bank’s decision-making process. This must be clarified before you agree to the purchase. All offers/revised offers must be in writing. In a Short Sale Addendum, the buyer will need to commit to a specific amount of time to allow for bank approval. For REOs, time is of the essence, as the bank may continue to review and accept other offers until your offer is fully executed by all parties and delivered back to the bank.
- Many lender-mediated properties receive multiple offers. We may or may not be informed of a multiple offer situation. The listing agents suggest you make your best offer first. Unfortunately, we cannot expect a counter offer. The homes are usually priced to sell quickly.
- Lenders usually require a specific amount of earnest money. A personal check is sufficient to make the offer, but will not be cashed. Typically, lenders require a cashier’s check to be hand-delivered to the listing agent within 1-2 days of final acceptance. Earnest money is non-refundable once all contingencies are removed. You may lose your earnest money if your financing falls apart.
- Lenders prefer cash offers. They may even accept a low cash offer over a higher bank-financed offer. For cash offers, a verification of funds must accompany the offer (ie. bank statement or a letter from the buyer’s bank).
- For financed offers, a pre-approval letter must accompany the offer. In addition, some lenders may require you to be pre-approved with a bank of their choice. However, the lender cannot force you to use their bank.
- The lender may agree to pay closing costs on your behalf. *Note: any unused portion will be retained by the seller.
- If your offer to purchase has a final loan commitment date, you will want to expedite everything so you can meet this deadline. If you do not receive your commitment letter by this date, you run the risk of the lender sending a cancellation and retaining your earnest money.
- Personal property (ie. stove, refrigerator, dishwasher, etc.) cannot be included in the purchase agreement, but they may be left on the premises. Even if personal property was in the home at the time of the showing, there is no guarantee it will be there after closing.
- The lender has no knowledge regarding the condition of the property, so they will not make any warranties or representation. They will likely require you to sign a waiver of the Minnesota ‘Seller’s Property Disclosure Statement’. All REO and short sale properties are sold “AS-IS”, so you must rely solely upon your own inspection with regard to the condition of the property.
- Contingencies based on inspection are highly recommended and accepted by lenders. After final acceptance of the purchase agreement, you will have a specific amount of time to inspect the property. Most lenders will not agree to repairs, but it may not hurt to ask depending upon the offer situation. If you find items of concern, the seller must agree (in writing) to any request for repairs. If you decide to cancel your purchase agreement (based on your inspection) the lender may require a copy of the inspection report from a qualified, licensed inspector.
- We must make sure the property is de-winterized in time for your inspection. The de-winterization and re-winterization (after the inspection) may be your expense, unless otherwise specified in the purchase agreement. You will also be responsible for the de-winterization prior to moving in.
- Delinquent and/or current utility bills should be paid in full by the seller on or before the closing date. If they are not paid in full, the buyer will have to assume responsibility for all unpaid bills. Questions regarding unpaid utilities, assessments, wells, septic systems, surveys, plats, etc. must be directed to city, county or state-governing authorities.
- Lenders will not accept any offers contingent upon the sale of another property.
- Lenders prefer to close within 30-45 days of final acceptance. They want to close as quickly as possible so they may negotiate a quicker closing date with you. Please note: if the home is Torrens property it may require extra time for the closing company to transfer title appropriately.
- Any buyer requested extensions to the closing date must be in the form of a written amendment. If the sale does not close on the date agreed upon in the original purchase agreement, the lender will likely implement a per diem charge for each day the closing is delayed (typically $100/day). Seller delays will not incur a per diem charge, but still must be addressed in a written amendment prior to the original closing date.
- Listing agents may provide periodic updates to the transaction prior to closing. Unfortunately, we are at the mercy of their systems and time frame. Excessive follow up on my part, may hinder the process.
- While you are not required to use the seller’s closer, the seller may limit or condition your agreement and ask you to pay title insurance and any seller related closing costs. Closings are seller-directed, so occasionally there are delays due to city inspections, title issues, and/or the execution of closing documents. Be sure to have a “back-up plan” (regarding your move) in the event your closing is delayed.
- The seller will convey title to the property by means of a Limited or Special warranty deed. This means the lender cannot offer you any protection against previous property title claims. You will want to talk with your closer about obtaining an owner’s title insurance policy. Please keep in mind that by not using my title company (and closer), I have less control over how you are represented at the closing.
Buyer Tips for Purchasing a Lender-Mediated Property
- The price is usually set by the seller and the realtor. However, the lender has the final say on what the home will sell for. So, if the sales price is too low compared to the lender’s appraisals, expect a counter offer on the price. Low ball offers will likely get no response.
- The closing date must be “within 30 days of written lender approval”.
- The top of page 7 (on the purchase agreement) must state, “This Purchase Agreement is subject to written lender approval, at terms acceptable to the seller.”
- Short sales will not sell for less than $.90 on the $1 and home must sell for 85-88% of BPO value for investor to accept it (includes commissions, fees, seller paids, 2nd lien payoff)
- Banks consider BPOs to be good for 90 days (they rarely reconsider doing a BPO upon request)
- The lender will pay up to 3% of buyer’s closing costs, if the seller has a conventional or VA loan. If the seller’s mortgage is FHA and the buyer’s loan is FHA, the lender will only pay 1%. If the buyer’s loan is conventional or VA, the lender will not pay any closing costs per HUD rules.
- The buyer is purchasing the property AS-IS. Neither the seller nor the lender usually makes any repairs. The inspection and any necessary repairs will likely be at the buyer’s expense (including appraisal work orders).
- The buyer should strongly consider doing their home inspection prior to the lender’s written approval, as there may be limited time to remove their inspection and financing contingencies after the lender’s acceptance. There are inspectors who will do short sale inspections at a reduced rate and wait to collect the balance after the lender’s written approval or upon closing.
- The seller or their lender will not pay for any of the following: well and septic tests, home warranties, lender processing fees, lender work orders or appraiser’s re-inspection fees. Any code compliance issues will also be the responsibility of the buyer.
- The final pre-approval letter must include the property address and the agreed upon purchase price, between the buyer and the seller.
- The seller may require the earnest money be deposited and cashed within 72 hours of seller’s acceptance. The earnest money will be refunded to buyer if the seller’s lender does not approve the short sale.
- A short sale with only one mortgage is more likely to be successful than a short sale with two or more mortgages. Wells Fargo, ASC and Bank of America require specific documentation be submitted with the Purchase Agreement (see seller’s offer instructions).
- Outstanding HOA dues may not be paid by the seller or the bank at closing. *Note: this may become a buyer expense. Typically, the bank will pay any outstanding utility bills and city/county assessments, but we can not guarantee it.
- It could take a few weeks to get the first “substantial” progress update from the seller’s lender. It could take a 2-3 months (or longer) for a short sale to be approved. *Note: not all short sales are approved.
Buyer Tips for Purchasing an REO Property
- You should negotiate (upfront) with the lender regarding who will be responsible for the cost of igniting the furnace/boiler/water heater, and turning on the water for the inspection. These mechanicals must be checked out, if property was winterized, to ensure there is no freeze damage. Consider requiring (in writing) the lender leave the heat on until closing if everything goes well with the inspection.
- After the inspection is completed and accepted, the lender will likely have their contractor disconnect the water meter in the house during the re-winterization process. The lender should not have the city shut off the water at the street. However, we can not control the listing agent or the bank. *NOTE: it will be your responsibility to de-winterize the property again before you move in. You may need to hire a plumber to perform the de-winterization. Improper re-winterize on the bank’s contractor’s part could result in new freeze damage. However, you may not know this until after you take possession of the property and de-winterize it again. You must be willing to take on this risk!
- At the final walk-through, we will turn on the water in the house if the water main is connected to ensure there are no burst pipes. If the water main is disconnected, you will have to wait until after closing to check for problems. Two final walk-throughs are suggested: one a few days before closing (in case of problems) and one right before closing.
- You should contact the MN Department of Health to determine if there are any wells on the property. If the state does not have record of one, and they determine that city water did not go in until after the house was built, there could be an unsealed well on the property. If the lender waives all property disclosures, they may also refuse to seal the well prior to closing. Therefore, it will likely need to be professionally sealed and recorded (at your expense) with the state, prior to the next sale.
- You also need to verify there are no vacant building fees (ex. Category 1) and/or any outstanding assessments. If there are, we will need to confirm that they will be paid by the seller at closing.
For “flipped” properties:
- The seller should provide lien waiver notices for work completed or materials supplied to the home.
- We must make sure the previous title company has recorded the deed from any previous purchase (with in the last year).
Each individual transaction is different. This information is to serve as a resource. As a Realtor, I am bound by law not to give legal advice. Please seek an appropriate professional for the interpretation of additional lender documents, if desired.