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Buying An REO or Bank Owned Property? Make Sure You Read The Fine Print.

Big Bear Bank Owned HomesGiven the current real estate climate, bank owned or REO (real estate owned by banks) properties have become highly sought after by today’s buyers.  Whether or not they ultimately end up purchasing one, most buyers are starting off with this thought in mind.

Naturally, these buyers are looking for a deal and most bank owned properties fit this category perfectly.  It is not uncommon to see Big Bear REO properties selling from 75 to 90 cents on the dollar as compared to similar homes on the market.

While buying a bank owned property can save you some money, there can be some major  contractual differences when buying a property from a bank as compared to a typical and the standard C.A.R. purchase contract.

Be careful!It is very common for a bank to have their own contract and/or addenda that they will require the buyer to sign and agree to.  Most of the differences in these contracts include potentially unfavorable terms that buyers should consider and discuss with their real estate agent or attorney prior to signing a contract to purchase a bank owned property.  To do otherwise is taking a big risk.

These are some of the most common types of terms banks like to add to the standard purchase contract (as provided by California Association of Realtors legal services):

·  Requiring a substantial amount for good faith deposit. This can become even more important should the buyer be in default and risk losing their deposit.

·  Requiring a buyer to prequalify with the REO lender. Getting prequalified is always a good idea.  But, assuming the buyer has already been prequalified with their own lender, this is just another step that a buyer will have to take, not to mention that they will probably push you to use that lender as well.

·  Requiring an “as is” clause. This is pretty typical and is included in the standard C.A.R. contract as well.  The key item to discern is what, exactly, they are referring to by “as is”.  Is the buyer still able to have a home inspection and back out of the contract with the deposit returned to them should they not approve of the inspections?  Or, are they tied into the property once they sign the contract?

·  Disallowing buyer contingencies, especially a contingency for sale of buyer’s property. Most sellers don’t like a contingency on the sale of buyer’s property either.  But, there are many other buyer contingencies, like the loan, appraisal, and home inspection.  It is very important to figure out what contingencies they do not want to allow for.

·  Allowing contingencies, but deeming them passively waived through the passage of time. The standard C.A.R. contract requires that the buyer actively remove their contingencies in writing.  Until the buyer does that, or the deal closes, the contingencies are deemed to have not been removed.  Passive removal means that once the time frame passes, 10 days for example, and the buyer has not said anything about, then the contingency is deemed to have been removed.  This is a very important distinction.

·  Refusing to do repairs (although an REO may be more willing to give credit in lieu of repairs). Most sellers these days are willing to do some repairs or credit for them to be done in order to keep the buyer on board with the purchase.

·  Refusing to pay closing costs. Some sellers are this way as well.

·  Refusing to provide a home warranty plan. Nearly every seller is willing to do this.  The cost for such a warranty runs from $300 to $500 for the upgraded plan.  While I am not a huge fan of home warranty companies (some are more difficult to deal with than it is worth), it is nice to have this extra insurance policy.

·  Refusing to provide disclosures. Most notably, the TDS or transfer disclosure statement.  This is a the statutorily required document in CA that the seller must give to the buyer disclosing what they know about the property that may materially effect the value of the property.  Banks, however, are not required to provide this form.  Because banks typically do not have any knowledge about the properties they own, they do not fill out these type of disclosure forms.  Accordingly, the buyer should really step up their due diligence efforts on their inspections to make sure they find out as much as possible on the property.

·  Charging a per diem or daily charge for any delays in closing escrow. Some of these clauses say that the buyer must pay up to $100.00 per day for every day that the escrow is late (assuming the delay is not caused by the seller/bank).  Given that the majority of escrows do not close on time as a result of the buyer, this could be a real cost the buyer.  And given that they would have removed their contingencies by that time, they could stuck in a bad position.

·  Requiring hold-harmless agreements. I am not too familiar with these type of clauses but there are some in the standard contracts as well.

·  Requiring a buyer to waive other rights. Such as the right to a home inspection or appraisal contingency.  It is not uncommon for them to shorten the buyer’s inspection time frame down to 5-7 days, if any time frame at all.  The standard time frame for the C.A.R. contract is 17 days.  Inspections can be done in a 5-7 time frame but everyone (buyer, agent, home inspector) need to be on the same page.

There are many great real estate opportunities in Big Bear on the market today.  Keeping these things in mind when buying a bank owned property should help save you time, money, and potential frustration down the road.  All banks are different so be sure to read the fine print on their contracts!


  1. Rob Saxe says

    Great article. Buying REO’s isn’t for the faint of heart. Blog looks wonderful!


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