Bank-owned home? Make offer at your peril…

This is not legal advice. For legal advice, consult an attorney, not a blog.

It appears that the number of foreclosures in the area will continue at a high rate into the foreseeable future. Thus, there will be more and more bank-owned homes for buyers to consider. But from the perspective of an average buyer, is that a good idea?

In my experience, and from my perspective as a lawyer, the answer is an emphatic, “No!” Banks tend to be far more concerned with protecting themselves without regard for actually selling the property. Their required addendums — no changes allowed! — severely restrict the buyer’s remedies if the deal blows up, or if the house is a complete lemon, or even if the buyer’s financing fails. Banks tend to be remarkably inflexible in regards to negotiations. Indeed, they often refuse to sign ANYTHING until it has been signed by the buyer, even when it is their own addendum! Thus, negotiations are difficult, and the resulting contract is weighted heavily in the seller’s favor. Banks impose unreasonable requirements, such as mandating a photocopy of a cashier’s check of the earnest money, rather than just a personal check. As a result of the required contractual terms and the bank’s inflexibility, if the deal gets squirrely the buyer runs a very real risk of losing her earnest money.

Is this true of all banks, in all transactions? Almost certainly not. It has been, however, my experience to date. Are some banks more reasonable than others in this regard? Very probably, but I’ve only come across the difficult ones.

In fact, if you’re thinking of making an offer on a property managed and sold via First American REO Servicing — well, proceed at your own peril. Based on my experience, as well as the experience of others, First American is remarkably difficult to deal with and its actions can be, quite simply, irrational.

I recently assisted a client in attempting to purchase a house from a bank where First American was acting for the seller. I could author a dozen posts about this very unpleasant experience, but who has that kind of time? Instead, I will simply give two examples. When I received the bank addendum, the box for “cash sale” was checked, as was the box for “buyer financing.” Clearly this was an error, as these two boxes were inconsistent. The listing agent agreed that this appeared to be an error. I was concerned about this ambiguity in the contract (like any other competent attorney). I assumed it would be an easy fix. I was, needless to say, wrong. The bank flat-out refused to correct this error and demanded that the contract proceed with these mutually inconsistent terms.

Once under contract, my FHA buyer proceeded to seek financing. Unfortunately, a previous buyer about four months earlier had also sought FHA financing, so an appraisal had been performed. Per FHA rules, another appraisal cannot be obtained within six months of the first. We received essentially no information about this prior buyer or lender, and nobody was able to find this prior appraisal. Eventually, we had to seek a new FHA file number for the property, which would in turn allow for a new appraisal. Of course, all of this took time and naturally required an extension of the closing date. Did the bank agree to a short extension? Of course not. Huh? Ready, willing, and able buyer (who had invested significant time and money into the property) who had a good faith reason for seeking an extension — but the bank did not budge. The deal collapsed as a result, and my client’s earnest money is now hotly contested.

One would think that banks would be anxious to sell these assets. One would think that they would work cooperatively with buyers. One would think that banks would act reasonably and rationally. One would be wrong. In my experience, banks — or at least the individuals sitting at desks in distant states who are responsible for these files — are unreasonable and, in at least one instance, may even be irrational. Proceed with an offer at your peril.

24 thoughts on “Bank-owned home? Make offer at your peril…

  1. Sadly, we deal with the big banks routinely that show a resilience of mud and the pace of a slug.

    This week’s incompetence derailing a perfect sale: large national bank recorded the wrong legal description on a Deed of Trust which showed up on a last minute search prior to recording a sale we were closing!! The borrowers refinanced another property they owned and the bank recorded it against the home they were selling! Lovely. That’s a great way to completely blow up a sale within MINUTES of recording.

    It is never closed until it’s closed.

    Talked with HSBC today regarding a subordination. Rep was asked by me to provide a fax # to submit a Subordination package. Rep says, we don’t have a subordination dept. I don’t even blink an eye and instantly hang up. Call 5 seconds later and get another rep. Answer from them: sure here’s the number and the direct line to the Subordination Dept. Unbelievable. Same company, same request, two different answers.

    Makes you want to just take a fast ball in the head from Felix and end your misery.

  2. Craig
    You are correct to state that on a REO purchase, all of the contract documents serve to protect the bank who owns the REO.
    But I disagree with your advice that buyers should avoid buying REOs.
    It is all a matter of price.
    If you can buy a house for $300,000 that sold 4 years ago for $600,000, the buyer has a very good chance to make an excellent purchase.
    EVERY REO contract that I have been involved in does give the buyer an inspection contingency. EVERY ONE! Maybe your experience is different.
    Yes, the contingency period is short generally 5 days.
    As you correctly state, the buyer signs all the contract documents before the bank does.
    In my experience the listing agents calls or emails and says “your buyers’ offer has been accepted. here is contract addendum from bank, have your buyer sign and return”. Typically it takes 5 days to get bank’s signature back.
    So from the time, one receives verbal acceptance; a buyer typically will have 10 days to do his inspections. 5 days to get contract signed by seller and then the 5 days in bank contract addendum.
    That is plenty of time to get inspections done.
    I have closed over 10 REO transactions in the past 6 months.
    In NO CASE has one of my buyers lost a deposit.
    On occasion, some of my buyers have cancelled the contract after their inspections.
    In ALL of these cases, my buyer got their deposit back.

    I work the San Francisco Peninsula and in certain areas, REOs can be purchased for $250,000.
    In most cases, my fix and flip investor buyers have made about $50,000 a house – not bad for a $250,000 investment and 3 to 4 month total holding period.
    Wouldn’t you agree that would be a good investment return?

    So while a buyer must use caution when purchasing an REO, I believe REOs offer many buyers a good opportunity to buy a property a discounted price. In my humble opinion, I believe your post overstates the risks and minimizes the potential reward in buying REOs.

  3. Arn — your criticism is fair, absolutely. Yes, bank prices tend to be lower than individuals’ resale prices, and as a result there is the opportunity for a quick and tidy profit (or, for that matter, greater appreciation of long term equity for the non-flipper).

    I think the issue is that the buyer must trust the bank to act rationally and behave like a motivated seller. The bank, for whatever reason, may not do so. As an attorney, I always tell my clients that the contract sets the legal rights and obligations of the parties, and oral representations ultimately mean nothing. Plus, I get nervous when my client enters into a contract that clearly favors the other party. By this standard, nobody should buy a bank owned property. But you make a very good counterpoint.

  4. Craig said: “I think the issue is that the buyer must trust the bank to act rationally and behave like a motivated seller.” Why would you think that, Craig?

    I wrote a post after this as I was closing one the day you wrote this.

    The advantage is all to the buyer as to price…terms are all to the seller’s favor. All real estate negotiations are a balance of price and terms. He who gets best price does not usually also get best terms.

    All bank-owned’s run pretty much the same. So if the expectations are set correctly by the representative of the buyer…they usually go pretty smoothly. But you can’t be late and you can’t not close…those are not options. So yes, do not make an offer on a bank owned if you really don’t want to buy it. Mainly you don’t wait for the seller to “do”…pretty much anything except wait for you to close…on time. And take your money if you don’t.

    • Ardell — in my transaction, the financing was delayed by an earlier FHA appraisal. By the time my client got a new appraisal, and had docs drawn up and delivered to escrow, the closing date had passed. Notwithstanding the fact that the deal was ready to close one week after the closing date, and all the parties needed to do was extend closing so escrow had authority to close, seller flat-out refused to extend closing. No explanation was ever provided. It is this type of behavior that can be described only as irrational — the seller seemed far more concerned with the minutiae of the deal rather than actually closing it and selling the house.

      Your approach is the right onw — don’t expect the bank to do anything but take your money. So if you feel like gamblin’ in order to get a good deal, than REO may be for you. But I’m a lawyer. My job is to reduce risk. Buying from a bank, regardless of the price, is risky.

  5. Craig,

    It seems oddly coincidental to me that you were writing this as I was closing the same day on a similar and similarly difficult transaction. We’ll have to compare notes to see if it was the same seller and closing people. I actually came to Rain City Guide to post some stats and predictions, when I saw your post and decided to write the similar story with a “happy ending”.

    It is important to note for readers that in a bank-owned contract, the buyer is liable for the inadequacies of a lender. They lump “fault of buyer or buyer’s lender” as one in the same. So choosing lender is always important…but on a bank owned it is doubly so…

    Basically it’s a “no excuses” contract. Kind of “do or die”.

    Generally banks don’t “grant” extensions, Craig. Meaning you have to proceed as if they did grant it. In my transaction (post after this one) when the lender required that a new roof be put on prior to closing AND a reinspect of that roof by the appraiser prior to closing, we only had a few days to be ready to close and a long holiday weekend coming as well. Virtually impossible. Yes, I did prepare a request for extension, but at the same time proceeded as if I had not. Banks do not like to sign anything…once they have accepted the offer they rarely sign anything except “as needed” and WITH the closing documents, not in advance of closing.

    Didn’t your contract have a per diem if the buyer was late? Usually they can go late…but the buyer has to pay a per diem if and when that happens, and proceed without knowing if they will be granted that extension or not. I did find a way for the buyer to not have to pay the per diem, even though the closing was late…but it was like moving mountains.

    With a bank-owned you have only two choices…cancel exactly at the point of legal out OR close.

    There’s no in between for negotiating during escrow, in most cases. Even if you want to negotiate something during escrow you have to cancel at legal out point and start over. That was not an option for me/us because we were preserving the $8,000 credit at the same time. So going out of contract and back in, would have meant giving up the tax credit, and possibly the house as well.

    The paper of a real estate transaction is not the driving force behind a real estate transaction at all. When all is said and done, the paper of it is the least important thing in a transaction that actually closes. The paper is ONLY important…if and when it does NOT close.

    Because the seller and seller’s agent did not expect us to be able to deal with the buyer’s lender issue in time…they stopped working on their side, assuming we could not possibly close on time (a pretty safe bet really). But we WERE ready…impossibly so…but yes, we were ready to close on time. That put THEM in breach of contract by not being ready the day of closing.

    I even had a back up escrow “courtesy” signing at the ready, because the seller was in control of escrow at a point when we needed to sign by X, and they were not granting an appointment to sign. Once they learned I had a back up signing all set up with loan docs sent to two places…they realized there was no way for them to not pass Go and collect the EM and/or the per diem. I had to be in a position of being ready to close…with or without them…which put them clearly in breach.

    I agree Craig that as a lawyer you likely could not have done what we did in my situation…heck, we put a roof on someone else’s house! LOL! But maybe that’s why an agent IS better than a lawyer… when it comes to real estate transactions. šŸ™‚

  6. Craig said: “But Iā€™m a lawyer. My job is to reduce risk. Buying from a bank, regardless of the price, is risky.”

    From my days as an Investment Officer, Craig, the definition of higher return…is greater risk. Best price and risk reduction, do not go hand in hand.

    A very wise broker once taught me: “We do not eliminate risk for our clients, Ardell; we MANAGE risk…and we manage it well”.

    • Well, I’m not sure about your “definition” of higher return, but I agree that higher returns entail higher risk. And yes, buying a bank-owned property is a good example of “higher risk, higher return” at least to some extent.

      I also agree that the “paper” of the transaction is not important if it closes (generally — lots of exceptions, but for purposes of this discussion I agree). In my transaction, I assumed that, notwithstanding the passage of the closing date, the seller would sell once my client was ready to close (i.e. loan docs ready to go following the delay in getting the appraisal). To my surprise, bank flat-out refused to sell, and moreover refused to give any reason for the decision. If the seller had expressed particular concerns, I would have worked hard to satisfy them. But instead I got a petulant “No!” I think any RATIONAL seller would have moved forward at that point. The bank did not. So when the “paper” is stacked against you, and the seller refuses to act rationally — well, that is a risky situation. Whether the risk is justified by the possible return — well, that must be calculated based on the specific proposed deal.

  7. Craig,

    You may recall from other commenters here that in places where lawyers are the norm for handling real estate transactions (parts of New York and North Jersey as example) there is no time is of the essence clause. There is good reason for that.

    Sellers, banks or otherwise, do not have to grant extensions. Breach equals not ready to close on close date, and extensions are never “a given” whether it is bank-owned or not, and regardless of reason why. Being unable to close on closing day is never a good thing and always puts the Earnest Money at risk.

    That is why a writer of a contract has to predict with a high degree of certainty, before putting a close date in the contract, or accepting a counter offer with a different close date. Most sellers would not think it is rational for a buyer to expect an extension…bank owned or not.

    Also extensions often cause rate locks to fall out. Many a buyer has agreed to an extension, only to find the rate lock does not go to that new close date.

    Contract close date extensions are more risky than bank owned transactions šŸ™‚

  8. Ardell – Thanks so much for the primer on closing date extensions. Very helpful.

    First, let me point out that I was serious in saying that I could author “a dozen posts” about this experience. The closing date was merely the FINAL instance of the seller acting irrationally. I was not speaking rhetorically.

    But lets take this discussion from the actual to the hypothetical so we can flesh out the point. I’m curious: in your experience, how many times have you seen this situation? (1) A total dog of a house (empty, undesirable neighborhood, in poor condition and needing a rehab loan, on market for about a year with several prior failed contracts); (2) a buyer whose loan docs were delayed due to events beyond his and his lender’s control (prior, undisclosed-by-seller FHA loan application by prior buyer, such that no new appraisal is possible without significant delay); (3) once docs prepared and at escrow, about a week following the set closing date, a buyer ready to close and needing ONLY an addendum instructing escrow to close (i.e. extending the closing date); and (4) a seller who refuses to close and refuses to give any reason or explanation whatsoever for refusing to close?

    Put aside the other 11 irrational actions of this particular seller. Based just on these facts, should I really NOT be surprised when the seller says, “No! I will not close!”?

    I think you are seriously underestimating the concept of “willing buyer, willing seller.” As you yourself pointed out, the “paperwork” is only important when something goes wrong. We assume — ALL THE TIME — that the seller wants to sell and the buyer wants to buy. We do NOT rely exclusively on the written agreement. By arguing otherwise you are grossly simplifying the process.

  9. Craig,

    First and foremost, we have these discussions for the benefit of readers and their being able to glean some benefit. If it were just about you and I having a peer-like chat for our own mutual benefit only…we would meet up for coffee šŸ™‚ Not trying to pick on you…in fact I thought it was an amazing coincidence as to the same day similarities of my closing that day and your blog post.

    The fallacy of your logic is that you expect an entity without a brain or a heart to be “rational”, which is a human quality. With the exception of “an irrational number”, being rational or irrational is a human virtue or frailty. An entity…a “bank-owned” sale, cannot be “expected’ to “act rationally”…only people have that quality. Only people can be “willing sellers”…or not, and can be expected to have mastered the art of rational behavior. Most people haven’t mastered that art, and no corporate entity can ever have a mental capacity…having no brain or heart.

    This has nothing to do with lawyers or agents representing buyers of bank-owned homes. To a large extent my knowledge and skill in this arena comes from my 20 years of having worked in a Bank prior to my 20 years in real estate.

    In the escrow I was closing at the same time as you, with likely the same closing people on the seller side. I spoke with the seller’s closing agent 4 times in one day and each time she asked “which property are you talking about?” Same with all of the conveyor-belt-like participants on the seller side. Many people doing only one tiny part of it all…and no cohesive “thought” process or continuity.

    Repeat after me…file open…pass to Suzy – file closed…pass to Johnny. file open – pass to Eric…file closed – pass to Mary. It’s a series of a file being opened and/or closed on someone’s desk, and we only see the local someones. There are many others behind the scenes, and the act of looking at the next more viable file is more important than the one that didn’t slide through like butter. “Not closing? – NEXT!” is the order of the day.

    The minute it didn’t close on the close date, it changes character, and goes to the bottom of some pile of many others in the “didn’t close status”. Short sales are similar. Often they have a time limit of 15 minutes…if not resolved by then…bottom of pile…start over…next! I think they have a timer on their desk.

    There are only two options in a bank owned, as I said before in a previous comment:

    1) Cancel on legal out (to preserve Earnest Money) and hope to restart
    2) Close…on time.

    You could have cancelled on Finance Contingency when the appraisal issue reared its ugly head and then submitted a new offer with a new close date. EXCEPT you likely were in the same problem area I was…they would lose the tax credit if the new contract was dated after April 30. I feel for you…I was fighting tooth and nail on mine while you were doing this one. The tax credit put an extra ball in the air making it more difficult to juggle an already impossibly difficult set of circumstances. I’m not kidding when I say it took every ounce of my being…and then some, to get through to the end on mine. It was “Rocky-like”. Good thing I’m from Philly šŸ™‚

    As to your appraisal issue…we’d have to chat in person or by phone for that one. I’ve only run into that once, and I can’t tell from the limited explanation you gave who was pushing for “use same appraisal”. If it was the lender…I would have switched lenders or ran two side by side. If it was to save money on the cost of a new appraisal by the buyer…wasn’t quite following you there. I see that more in short sales from the lienholder, than in bank-owned purchases from the buyer’s lender.

    Likely had to do with the “rehab” loan aspect of yours…and there it falls on making sure the original estimate of close time is accurate or sliding on an auto 30 day or 15 day extension “if needed by lender” vs buyer negligence of any kind. I’ve used that a few times. If there were no competing offers and it was on market that long…hold out for the terms you need to close plus an auto-extension if needed. Or pull out on the finance contingency and do a do-over to preserve the Earnest Money.

    There is no “rational” action…the only quasi-rational action is the day they accept your offer. After that you are on your own…Ball’s in your Court…and you have a drop dead date.

    If this has been in and out of escrow, maybe collecting a bunch of Earnest Monies has become their only profit-making means on this thing…or their best one. How long was escrow? Was it in excess of the normal time needed for a rehab loan? At least a 60 day escrow? If not, it may have been doomed coming out the gate…

Leave a Reply