Avoiding Some Critical Mistakes When Buying REO’s

by James J. Cummings III on February 14, 2011

When REO buyers bring in contracts that they have already signed for REO properties, it is usually late for changes. Typically the “contract” consists of the standard form of contract used locally plus some onerous addendum that the REO seller insists upon.

These one-sided REO contract addendums often provide for (1) a ridiculously short closing schedule which, if not met, requires daily penalty payments, even if the delay is caused by the seller or the seller’s defective title (2) no title documents provided by the REO seller or buyer is required to use a specified title company (with some relationship to lender, casting doubt on marketable title), (3) buyer pays all expenses, even that of the seller, (4) right of attorney approval (after signing) is waived, and (5) seller does not have to turn the utilities on for any inspections, but property is sold, of course, “as-is.” These are just a few of the many treacherous provisions found in typical REO contract addendums.

The most important advice I can give a buyer of an REO property is to stay calm (even if the broker tells you that you have two hours to look at the property and put in an offer), think through each provision of the contract (especially any contract addendum) and call your attorney before you sign. Trying to amend the contract and addendum later is next to impossible. So discuss the key points of the deal and the closing process with your attorney before signing your final offer.

Have a realistic closing schedule (especially if mortgage financing is involved)
Make sure that the seller will provide the usual and customary title documents and pay the typical seller expenses (such as in New York where sellers have to pay a transfer tax)
Provide that you are free to choose your own title company to examine title and issue a title insurance policy
Make it clear that the utilities will be on for your inspection (especially in the cold climate areas where there can be cracked pipes in the walls, etc) and that you have a reasonable amount of time to make the inspection, cancel the contract, if necessary, and receive back your deposit
Cross out provisions where you are asked to give up your statutory rights and protections

Good luck and happy hunting!

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