Are you buying an REO home in New Jersey?

The procedure of buying bank-owned residential or commercial property in New Jersey has distinct challenges, consisting of purchaser handling certificate of occupancy, the residential or commercial property being strictly "as-is", and restricted appraisal and mortgage contingencies. Learn more in the video or transcript listed below!

VIDEO TRANSCRIPT:

Good early morning. This is Earl White, Real Estate Attorney. This is a video about five things you require to understand when buying an REO bank owned residential or commercial property. This is when the bank owns the residential or commercial property after a foreclosure has actually been completed. The procedure is quite various compared to buying other types of residential or commercial property and other standard sales, so we'll focus on 5 big things.

First, the lawyer evaluation process is extremely various. Normally, in New Jersey, as soon as it enters into lawyer review, the buyer's lawyer and seller's lawyer negotiate a "rider", which is basically an addendum to the contract, including in any required changes and some popular modifications. There'll be a typical regional lawyer representing the purchaser and the seller. With an REO residential or commercial property, bank owned residential or commercial property, the bank, the seller, is not going to have a regional lawyer. In reality, usually there won't even be a lawyer appointed. There'll be some sort of asset manager, perhaps the real estate agent will be handling it closely or another representative, however there's not going to be any lawyer for a buyer's lawyer like myself to work out with any unique modifications to the contract.

There's not going to be another lawyer that I could call and attempt to describe something unique about the deal. Any special modifications are not going to get put in during the lawyer evaluation procedure. That also implies that there's some traditional defenses I would usually include during attorney review that I would not be able to include an REO sale, so something along the lines of appraisal contingency securities, extra defenses for code violations, things relating to back due taxes that might come in the future, things of these natures, extra protections I would add if I could deal with another lawyer sort of like myself, they would comprehend.

With an REO, there's no other attorney and they're not going to be flexible on making any modifications during lawyer review. What will take place throughout lawyer review though is that you'll sign the regular real estate agent agreement and after that there'll be like an addendum, like a bank addendum to the agreement with some pretty heavy handed terms favorable to the bank. The lawyer review is going to be more structured, it's more of a take it or leave it. We really need to promote something, we can, however it's going to be more take it or leave it on the bank's terms in lawyer evaluation. That's one difference is the lawyer evaluation process is just rather different and more rigid with the buyer having less space to make any changes to the preliminary contract or the bank's addendum.

Another essential thing to be familiar with with the REO sales is that the timeframes are stringent. Most of the sales that ... The majority of residential sales, the due dates are flexible. They're not "time is of the essence". If a person misses out on a deadline by a day, you send your inspection request a day late or your mortgage dedication's a day late or you pass the closing date a week, not actually a big offer since the agreements are established that way.

REO offers are not like that. The dates often are set up to be time is of the essence. On the buy side of the deal, you often have more commitments. You got to do evaluations, you do your appraisals, you get your mortgage. It's more in your corner, so you require to ensure you're on point with all your dates and all your timeframes since there isn't going to be much versatility built into the agreement.

REOs are also strictly as is sales. I know regular sales, even in the base real estate agent contract, paragraph 16 says, "Seller represents the sale is as is." All the sales are normally as is, however often the buyer will make the point that, oh, we're truly going to treat this as an as is sale. We're not going to make any ask for repairs. Once you begin decreasing the sales process, purchaser has an assessment, something new is found and you still might make a demand for repair or credit or price reduction. With the bank owned residential or commercial properties, they are really rigorous as is sales.

The bank is not going to change the price. They're not going to begin giving credits. To even get that, to even attempt to make that credit, it would be challenging because, as I pointed out, there's no attorney for me to even send a demand for an agreement addendum to. It would take the bank 10 days just to even think about the request, right? A quarter of the way to the closing it would take them to even just think of and make a decision on this. That's how institutional it is.

They truly are rigorous as is sales, and that is also some risk for you putting time into the deal due to the fact that considered that it was an REO, the previous owner got foreclosed on, they may not have actually been taking the best care of the residential or commercial property because they knew they most likely were going to lose it to the bank. There could be physical problems there. I mean most REO contracts do offer you still a right to check and you still have a right to cancel and get your deposit back. Again, the bank is going to treat it as a real as is sale and is not going to work out credits or repairs.

Another big difference with these REOs sales is that the purchaser deals with the certificate of occupancy and smoke certificate. Most sales, 99, if not 99.9% of the time, seller usually has the responsibility to get the certificate of occupancy, which is when a city inspector, you call the city billing department, they send out inspector out to the residential or commercial property. They look for code offenses, habitability concerns, anything like that. They provide a certificate that states the residential or commercial property complies with a zoning code or something like that.

Normally seller obligation. In the preliminary real estate agent agreement, it is by default seller obligation. REOs is the opposite. They're going to press that onto the buyer and there is constantly heavy handed language therein. Again, you can't actually work out these things that well. If you're going to do the REO sale, there's dangers here. They're either going to shift the responsibility to the buyer to spend for all the costs for the certificate occupancy and also smoke certificate, which is getting carbon monoxide gas detector, fire extinguisher, smoke detector, et cetera, to the buyer.

Now, the threat here, and different sale, I would have protection, I might construct protections for this, however not for this type of one, I would include something like purchaser is ... Say, buyers, "Okay, I'm going to handle responsibility for CO. Despite the fact that it's not regular, that's how I'm going to get my offer accepted." I would include a defense like if the expense to get the CO to the purchaser is greater than 2,500 dollars, then the purchaser can cancel if the seller will not begin the distinction. Right? That's not going to fly in REO, that kind of protection. Right? You're going to need to take on the obligation to get the CO. If their expenses show up and they're more than 2,500, who understands what they might be, then if you don't finish the sale, you might lose your deposit. That's a danger that you take doing an REO offer.

The other thing I'm discussing, the key difference here is there's no appraisal contingencies. In the preliminary real estate agent agreement, the word appraisal isn't even discussed, right? There's no official appraisal contingency included in the real estate agent agreement, so you have to add that in attorney review. As I pointed out in point one in this video, you can't actually make much adjustments like using attorney evaluation riders for an REO deal. What about the appraisal?

For the appraisal, you're not going to get an appraisal contingency for an REO deal. What it'll boil down to regarding the appraisal is that if the residential or commercial property assesses so low that your mortgage gets denied, then you can still cancel the offer and you can still cancel the offer upon getting a mortgage rejection letter. If it's really low, you're not on the hook to move forward with the offer and comprise the cash instantly, so you don't need to make up cash, but it will simply come down to if your mortgage gets authorized or not approved.

The reason that is not excellent since, say, you're putting 20% down, right? If it under appraises by, say, $20,000, you might still get approved for the exact same quantity of the mortgage and not get rejected, however you just would have less equity in the residential or commercial property. Instead of being a 20% down mortgage on the appraisal value, generally under evaluated, perhaps now you're authorized for the exact same quantity, but it's just 15% down on the appraisal value. Now since you're not 20% down, you need to start paying PMI or become worse terms.

Again, you're not going to get a formal appraisal contingency. You have less equity in the residential or commercial property, less terms, worse mortgage terms. It's not a concern if you can get rejected for the mortgage, however you might not get denied. You still may get authorized for your mortgage even though it under evaluated, in which case then you're stuck with even worse terms and no chance to leave the deal and just type of need to consume the lower appraisal in that situation.

Okay, hope this video was useful. Let me know in the comments any questions about REO sales, how those contracts work. If you need assist with any property deals, do not hesitate to reach out 201-389-8275.

This blog applies to purchasing a an REO bank-owned home in Newark, Jersey City, Hoboken, Paterson, Elizabeth, Union City, West New York, Bayonne, East Orange, West Orange, North Bergen, Clifton, Bloomfield, New Brunswick, Atlantic City, and across Bergen County, Essex County, Hudson Couny, Union County, Morris County, Somerset County, Atlantic County, Monmouth County, Middlesex County, Ocean County, and Passaic County.

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