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Foreclosures 101 (Part 1): What You Need to Know and Do Before You Purchase a REO

So, you have been saving your pennies and see all these great deals on foreclosure or REO (Real Estate Owned) properties and maybe even spoken to a Realtor about looking at a few. Before you take the plunge, it’s very important that you educate yourself in REO sales so that you know what to expect during your journey!

Here’s a Makaha Valley Towers REO (MLS# 1202164) can be yours for $80,000

Today, in Part 1, we’ll start with what you need to know and do before you even start looking. Oh no! Just took the wind out of your sails with that, now didn’t I? Trust me, preparation is KEY if you decide to purchase a foreclosed on property. You’ll be glad that you prepared yourself in the long run. These tips and steps will make your transaction go much smoother.

Not all of the issues listed here occur in every REO transaction. Many proceed relatively smoothly. However, it is important that you approach these transactions forewarned and fully informed. I’m not trying to scare you, but knowing up front about potential problems, or what could happen, will really help you.

Things to Know Before You Purchase

Keep in mind that the seller of these properties is not an individual, but a bureaucracy. Decisions are made by several different individuals under the advice of counsel. Everything is policy driven and guidelines are generally hard and fast. This type of transaction requires a large dose of patience! 

Therefore, please be advised that:

As mentioned above, a REO is a sale by committee and moves very slowly. Very little happens as scheduled. Closing dates may far exceed those defined in the Purchase Contract. Buyers should not plan on moving in on the day set forth in the contract, or moving in at all until certain benchmarks are achieved (I’ll explain those later – in Part 3).

REO Sales Are Entirely “AS IS”

It is important to note that, generally, REO sales are entirely “AS IS”, with no representation implied or expressed. In an overwhelming percentage of cases, the sellers do not negotiate repairs, credits, or purchase price as part of the C-51 contingency. 

Therefore, when you submit your initial offering price, you should be prepared to accept the property “AS IS” at that price. If you are uncomfortable signing an “AS IS” addendum, it’s probably best not to make an offer on a REO property.

Delivering Clear Title

The fact that the property was acquired through foreclosure often creates deficiencies in title, which usually do not become evident until there is an attempt to transfer title in a subsequent sale. Delivering clear title is a condition of the Purchase Contract and the Title Company will not close unless that is the case.

Unfortunately, this is the area in which foreclosed properties present the most problems. It is common for escrow to be delayed thirty to ninety days in order for the seller to provide the appropriate paperwork to deliver clear title. Be aware of the potential for clouded title and the delays that may incur.

It is Always Best to Use Local Lender Branches in Hawaii

The majority of mainland lenders seem to suffer from delays. If you (and your lender) are not able to meet the strict time frames and deadlines of this REO transaction, it is possible that the seller will terminate the contract and re-market the property instead of grant numerous extensions.

One of the most important things that you need to do is go to a lender FIRST before you start looking at properties. You must be pre-approved for a loan. These properties are often under priced for the market as the condition, etc., is factored into the price.

This means that these properties tend to sell VERY QUICKLY…the majority of the REO’s I list are under contract within one week. So you need to have a solid pre-approval in hand if you intend to submit an offer on a property. The sellers will not even consider your offer without a pre-approval. You will likely be bidding with other buyers for the property you want, so having that pre-approval is essential to your offer.

Overview

Get ready to roll up your shirtsleeves! As mentioned above, REO’s are sold “AS IS”. Most have deferred maintenance and this is factored into the low attractive price that got your attention in the first place. You will have to be open to fixing and/or replacing items in your new purchase. It will take some elbow grease and you’re going to get dirty! However, the end result may well be your dream home, so what’s a little sweat equity between friends? 

Next up comes Part Two – Submitting an Offer on a Foreclosure/REO Property. See you then!

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Ron Margolis

March 15, 2012

Nice post Jayney. Appreciate the advice and insight.

Ron Margolis

March 15, 2012

Nice post Jayney. Appreciate the advice and insight.

Michele McKinley, RS SFR

March 15, 2012

Thanks Jayney! Great Blog w/ great info! Hope you are enjoying your #hawaiilife!!!

Michele McKinley, RS SFR

March 15, 2012

Thanks Jayney! Great Blog w/ great info! Hope you are enjoying your #hawaiilife!!!

Gary Bland

March 15, 2012

I liked your article and posted to my Facebook and Tweets. Thank You for your time with making this eventful for anyone looking to buy Foreclosures.

Gary Bland

March 15, 2012

I liked your article and posted to my Facebook and Tweets. Thank You for your time with making this eventful for anyone looking to buy Foreclosures.

Ken

March 16, 2012

This is the greatest post I have ever read. EMail me parts 2 and 3 right away!

Ken

March 16, 2012

This is the greatest post I have ever read. EMail me parts 2 and 3 right away!

Jayney Sharpe

March 16, 2012

Why thank you Ken! As soon as I am done writing them, I certainly will!

Jayney Sharpe

March 16, 2012

Why thank you Ken! As soon as I am done writing them, I certainly will!

Carol Andrews

March 18, 2012

Thank you for your article look forward to part 2. I appreciate being able to pass along solid information to my clients.
Aloha,
Carol

Carol Andrews

March 18, 2012

Thank you for your article look forward to part 2. I appreciate being able to pass along solid information to my clients.
Aloha,
Carol

Beth Thoma Robinson R(B)

March 19, 2012

Hi Jayney, I love having you in Hawaii Life and miss having you on the other side of REO transactions. Right now I’m going through ones that get multiple offers very quickly…but then we wait a month for seller signed docs to open escrow. Nightmare for our buyers. Thanks for sharing your expertise
Beth

Jayney Sharpe, RA SFR

March 19, 2012

Thank you for the compliments! @Beth, I know…isn’t it funny (not!) that there are hard and fast deadlines that we have to meet so that we can hurry up and wait? As a great Realtor, your buyers know what to expect but I see a lot of buyers out there who need guidance. Every little bit helps!

Beth Thoma Robinson R(B)

March 19, 2012

Hi Jayney, I love having you in Hawaii Life and miss having you on the other side of REO transactions. Right now I’m going through ones that get multiple offers very quickly…but then we wait a month for seller signed docs to open escrow. Nightmare for our buyers. Thanks for sharing your expertise
Beth

Jayney Sharpe, RA SFR

March 19, 2012

Thank you for the compliments! @Beth, I know…isn’t it funny (not!) that there are hard and fast deadlines that we have to meet so that we can hurry up and wait? As a great Realtor, your buyers know what to expect but I see a lot of buyers out there who need guidance. Every little bit helps!

Tricia Morris

March 21, 2012

Great post and tips Jayney. I am glad to read you mentioned that “It is Always Best to Use Local Lender Branches in Hawaii”

Having a local lender will really help the Buyer and their Realtor navigate the process. Since the contracts are “as is”, buyers may not know that they have problems until late in the process. Buyer will want a lender who is not only local but who has relationships with many lenders. Buyers need someone on their team who can be proactive and has many resources.

Tricia Morris

March 21, 2012

Great post and tips Jayney. I am glad to read you mentioned that “It is Always Best to Use Local Lender Branches in Hawaii”

Having a local lender will really help the Buyer and their Realtor navigate the process. Since the contracts are “as is”, buyers may not know that they have problems until late in the process. Buyer will want a lender who is not only local but who has relationships with many lenders. Buyers need someone on their team who can be proactive and has many resources.

Pam Deery, R(B)

March 24, 2012

Thanks Jayney for this informative outline for all our “bargain shoppers”. You are an invaluable source of information. Seems you don’t get a bargain without a bit of a wait in line on both ends of the REO transactions.

Pam Deery, R(B)

March 24, 2012

Thanks Jayney for this informative outline for all our “bargain shoppers”. You are an invaluable source of information. Seems you don’t get a bargain without a bit of a wait in line on both ends of the REO transactions.

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