Just when I thought I had seen it all, my office encountered an REO resale transaction with an interesting twist. A day before our client’s closing, an individual whose name had not previously appeared in the chain of title filed a complicated 14 page “Affidavit of Ownership” against the property, proclaiming rights to the property under a theory which has little support under Georgia real estate law, but which has become an increasingly common problem for REO properties in Georgia. Under the theory that he could unilaterally declare himself exempt from the laws of the United States, this “sovereign nation” claimant had even gone so far as to break in, change the locks, and rent the property out to an unsuspecting tenant. Others like this claimant, who was eventually arrested, are targeting foreclosed properties because they are often unmonitored and easy to identify. This is an extreme example, but REO closings in general tend to have unique pitfalls.
An REO, or “Real Estate Owned” closing is one in which a lender or bank is re-selling property post-foreclosure. The REO property is usually one of thousands in a bank’s asset portfolio, and the typically overburdened asset manager’s chief objective is to get the property off the bank’s books as quickly and cheaply as possible without subjecting the bank to lingering liability for the asset. These asset managers rely heavily on listing agents and form contract addenda to manage a heavy caseload. REO transactions can take weeks to close, and buyers often walk away in frustration, despite rock bottom pricing.
Successfully closing the sale of an REO property is all about managing expectations. First, would-be buyers need to be reminded that they are negotiating with an institution, not a warm blooded seller. Institutions do not have an emotional stake in their sales, so they are unlikely to be willing to enter into complicated negotiations, or to be swayed by a buyer’s hardship if sales are not closed timely.
Second, a bank’s asset manager is usually someone who has no knowledge of the property’s history, and is, therefore, in no position to give assurances as to the property’s condition. The bank’s primary goal is to make as few representations as possible and to be completely done with the property after it has closed. That means no lingering responsibility for repairs, no tax re-prorations and no follow up calls about where to find the water shut off valve after closing. Buyers need to be thorough in addressing issues prior to closing, as they lose their right to object to property defects once the ink on the deed is dry. While transferable third party warranties may already be in effect on appliances, etc., documentation proving the existence of those warranties and service records are most likely long gone by the time the property goes through foreclosure.
Third, it is unwise to assume that title to the REO property will be clean once the property has passed through foreclosure. While it is true that a foreclosure sale will wipe out subordinate liens and the bulk of any problems caused by former owners of the property, it will not work to extinguish the liens of ad valorem taxes, or problems that may have been missed when the previous owner bought the property. It is highly advisable for anyone purchasing REO properties to buy a policy of owner’s title insurance at closing.
When listing or selling REO property, consider adding the following items to your checklist:
- Keys. The lock box key is likely to be the only one available to the buyer, but there is no telling how many people have a copy. Advise any purchaser to arrange to have the property re-keyed as soon as possible after closing. Consider the necessity of reprogramming and/or purchasing new garage door openers, security gates, etc.
- Third party warranty. Suggest that the buyer purchase a one year third party warranty at closing, or negotiate it into the purchase contract to compensate for the seller’s limited representations as to property condition.
- Title. Request that the closing agent provide you with a clean title report early enough that everyone has time to react to problems before closing, and urge your buyer to purchase an owner’s title insurance policy if not provided by the seller.
- Encourage lots of extra patience. Allow enough time between contract execution and the closing date for the seller to get documents to the closing agent, and warn the buyer to be flexible in the event the closing date needs to be postponed a day or two, because the seller’s documents may be buried under a mountain of others.