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REO Transactions

5 Common Myths Concerning REO Sales:

Myth #1:  Sellers of REO properties are exempt from all disclosures.

While many REO lenders/sellers stamp all the contracts and disclosures with the statement Seller Exempt from all Disclosures, this is simply not the case.  CAR puts out an excellent chart that indicates which disclosures are required and which are not for REO properties.  REO sellers are exempt from providing the Transfer Disclosure Statement and the Residential Earthquake Hazard Report.  REO sellers are NOT, however, exempt from disclosing any material facts that they are aware of concerning the property.  While they do not have to use a TDS to disclose any material facts, they are required to disclose these facts in writing to the Buyer.  Further, while REO Sellers are exempt from providing a Buyer with a Natural Hazard Disclosure Statement, the law does not exempt them from disclosing many of the zones that are contained in such reports.  While this law makes little sense, it is highly suggested that the Natural Hazard Disclosure Report be provided to all Buyers since the REO Seller has affirmative duties to disclose such zones and there is really no way to properly do so without the use of such a report.  Next, REO Sellers are not exempt from the lead based paint disclosure on properties built prior to 1978.  While the REO Seller is not required to pay for Smoke Detector, Water Heater Bracing and other local mandatory government retrofit requirements, they are not exempt from filling out the appropriate CAR Smoke Detector and Water Heater Disclosure forms.  LA city also requires the Certificate of Compliance form to be completed regardless of who actually pays for the retrofit work. Providing these forms without Seller signature is not in compliance.  Someone with authority to sign on behalf of the Seller should be signing these disclosure forms.  Also, remember that both the listing and selling agent are required to perform a visual inspection of the accessible areas of all residential 1-4 unit properties and disclose the results of that inspection to the Buyer.  There is no exception to this rule for REO properties.

Myth #2:  Buyers should simply sign the REO Addenda provided to them without reviewing these documents.

This can be a very dangerous practice, both from a liability and expense perspective.  Many of these addenda provided by REO Sellers are heavily weighted in favor of the Sellers.  While the Buyer may have little choice in signing these addenda since the REO Seller may refuse to sell to them unless they are signed, that doesn’t mean that the Buyer should not carefully review them first to see how they impact the Buyer’s legal positions and expenses that they may incur.  While it is traditional for the average Seller in Southern California to pay for the mandatory retrofit items and the Country and City Transfer taxes, these addenda often pass this responsibility on to the Buyer.  These are negotiable items between a Buyer and Seller, but it is important for a Buyer to be aware of exactly what they are going to be responsible for since this could add up to thousands of dollars.

Myth #3:  All Sellers provide Buyers with the Same Type of Title Insurance Policy.

While the CAR Residential Purchase Agreement calls for the Seller to provide the Buyer with an ALTA/CLTA Homeowners Policy, the REO addenda may change this to a Standard Policy of Title Insurance which provides less coverage than the abovementioned policy.  Once again this is a negotiable item, but in such event, it would be wise for the Real Estate agent to counsel the Buyer on the possibility of the Buyer paying the difference between the Standard Policy and the ALTA/CLTA Homeowners policy.  The cost is relatively low and it could prevent a major problem in the future.

Myth #4:  REO properties are sold AS IS and the Buyer cannot ask the Seller to make any repairs after completing the home inspection.

While it is true that REO properties are sold as is and while you will undoubtedly see quite a bit of language in the REO addenda indicating that the Seller will not make any repairs whatsoever, nothing prevents a Buyer from asking the Seller to make repairs as a result of the home inspection.  The Seller can certainly say no, but often times the Seller will agree to certain repairs or to a credit or reduction in the sales price.  You should certainly prepare your Buyers for the possibility that the Seller will say no, but, as they say, it never hurts to ask.

Myth #5:  It is Illegal or Unethical for an REO Seller to require a Buyer to get prequalified or preapproved though a specific lender of Seller’s choice.

While this might be inconvenient for a Buyer, there is a good business reason for requiring such a prequalification or preapproval.  Unfortunately, there are many lenders out in the field issuing prequalification letters that turn out to be worthless.  In such cases, the property may be tied up for weeks only to find that the Buyer really isn’t qualified for the loan in question.  The Seller has the right to have the Buyer evaluated by a Lender who the Seller has confidence in to determine up front whether the Buyer appears to be capable of obtaining the loan in question.  The Seller cannot, however, require the Buyer to obtain the loan through that particular lender.

As a final comment, it is always wise to prepare your Buyer ahead of time when dealing with an REO property.  There may be time delays in getting an offer presented and accepted.  There may be additional delays in getting documentation from the lender and there may even be delays in closing the escrow caused by the Sellers.  Making the Buyers aware of these issues up front may help smooth the way a bit down the road.  And don’t forget to use the CAR form entitled REO Advisory.  This form is designed to provide the Buyer and Seller with important disclosures and information regarding the REO process.

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