General Overview of REOs

There comes a time in a real estate market cycle when REO transactions take center stage.  When this happens, it raises many legal and practical concerns for REALTORS®.  Are REO transactions a viable business opportunity?  Are there special disclosure requirements?  Are there common pitfalls to watch out for? 

For complete information on all the general and legal concerns of REOs, read the C.A.R. legal article on REO transactions.

An  “REO” is a commonly-used acronym for “real estate owned” by banks.  Instead of an individual person or persons owning the property as in a typical resale transaction, a bank owns the property instead.  The bank typically acquires title to its REO properties through the foreclosure process.  However, REO properties may also be acquired through other means, such as a deed-in-lieu of foreclosure, tax sale, or corporate housing.  

Buyer of a Bank Owned Property (REO)

Before making an offer, the buyer’s agent may want to contact the listing agent and ask some of the following: Are there any inspection reports? What work, if any, has the bank agreed to? How long does it take the bank to accept an offer?

If an agent is working with a buyer of an REO, the Section 1 pest certification should be included in the purchase offer. Banks will allow you to get all the inspections a buyer wants (at the buyer’s expense), but may not agree to do any repairs. Banks always prefer to sell a property in "as is" condition, but most will provide a Section 1 pest certification.

The agent’s purchase offer should include an inspection contingency period that allows the buyer to terminate the sale if the inspections reveal unanticipated damages that the bank will not correct.

Even if the buyer agrees to purchasing the property “as is," the agent should always give the bank another opportunity to make repairs or give the buyer a credit through escrow. Sometimes the bank will re-negotiate to save the transaction instead of putting the property back on the market.

Banks with REOs are exempt from the Transfer Disclosure Statement (TDS).

HOWEVER, since the agent is a licensed real estate agent, and whether the agent represents the buyer OR the bank, the agent is required to provide all disclosure statements, including an Agent Visual Inspection Disclosure.

In Summary, when representing a buyer of an REO, the agent should:

1. Use standard purchase Agreement
2. Include in the offer
   • Section 1 pest certification.
   • An inspection contingency period that allows the buyer to terminate the sale if the inspections reveal damages the bank will not correct.
3. Attempt to negotiate any repairs needed.
4. Provide all standard forms and disclosure statements
• Include an Agent Visual Inspection Disclosure
• Include an REO Purchase Advisory (C.A.R. form REO)
5. Disclosures a bank is not lawfully required to provide on REOs include:

• Transfer Disclosure Statement
• Earthquake Safety booklet
• Industrial Use Zone Location
• Mello-Roos and 1915 Bond Act Assessments
• Military Ordinance Location
• Mold Disclosure
• Natural Hazard Disclosure Statement
• Residential Environmental Hazard Booklet
• Supplemental Property Tax Notice

Though Banks with REOs are exempt from providing the California Seller's Transfer Disclosure Statement (TDS), the buyer’s agent is not exempt from exercising maximum due diligence and care in protecting the buyer’s principal. This includes ensuring an expanded Natural Hazard report is ordered and reviewed for factors such as: Earthquake zone, Industrial Use Zone, Mello-Roos and 1915 Bond Act Assessments, Military Ordinance Location, etc. Visit the REO Disclosures Guide for a complete overview of REO Disclosures.

Disclosure Chart for REO Property Sales

The Disclosure Chart for REO Property Sales (Residential 1 - 4 Unit Properties), is designed to provide REALTORS® and their clients with an easy-to-use reference guide for determining the general applicability of the law to these types of sales transactions.

Similar information is available in the Sales Disclosure Chart for REALTORS® and greater detail can be found regarding the disclosure triggers in the Summary Disclosure Chart for REALTORS®.  For example, the chart may indicate a "yes" for the Lead-Based Paint disclosure requirement; however, it is only required for properties built before 1978.  The more detailed requirements can be found in the Summary Disclosure Chart for REALTORS®.

Summary

Foreclosure Sales, Shorts Sales, and REO Sales represent an opportunity for real estate agents to help both buyers and sellers.

However, all three types of transactions involve many legal issues. The Home Equity Sales Act and the Foreclosure Consultant Act both have laws and provisions affecting these transactions.

Be aware that each type of transaction has its own legal requirements and forms, and these vary depending on whether you are representing the buyer or the seller.

 

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