Buyers must still beware with REO foreclosure property purchases
As I write this blog entry, inventory in my local real estate market of Broward County Florida has been falling and prices have been increasing (according to the Miami Association of Realtors) – both signs of a recovering market. We are not, however, back to health. Distressed sale (REO and short sales) still accounted for 41 % of all sales.
With good (or at least better) news headlines hitting the web and airwaves it easy to forget this isn’t a normal market, and old rules still don’t apply. A recent experience highlighted this reality for me and a client.
I am a co-owner of Closing Express, Inc., a full service title company, established in 2004. My company is owned and operated by Michael Weissman and myself, attorneys with over 30 years combined real estate experience. We primarily close transactions in Broward County, including Coral Springs, Parkland, Sunrise, I am also a partner in the Law Offices of Damiani & Weissman, P.A., established in 1991. In the law office, we primarily limit our practice to real estate related matters .
A client, who I will call Bob, came to my office with a contract to purchase an REO single family residence. Bob was not working with his own agent, and went directly to the listing agent. The listing agent was insistent that time was of the essence and that my client needed to sign the seller’s addendum and pay his good faith deposit as soon as possible.
The problems associated with REO Seller addendums are myriad and could fill several blog entries. The addendum Bob provided was no exception. To begin with, the addendum was dated, and provided that all time periods run from the date of the addendum. Guess what – time had already run. Bob was never advised that if he signed the addendum, his inspection period would already have passed. In this case, it didn’t matter because Bob planned on a complete rehab.
When a purchaser buys an REO property, in my opinion, they are best served by hiring their own reputable closing agent. Although everyone involved in a transaction (including the closing agent) has an interest in the deal closing, I doubt most individual closing agents hired by a Buyer will intentionally ignore a title problem in order to get a deal to close. It is not worth the claim. I am not so sure on the seller’s side. I have time and again required title issues to be resolved by a Seller’s chosen closing agent that would never have been addressed but for my involvement.
In Bob’s case, we immediately met with significant resistance when we asked that my office be permitted to close the transaction. In most REO contracts, the seller will allow the Buyer to choose their own settlement agent, but will not pay for the buyer’s policy of title insurance if the Buyer chooses their own closer (when you run the numbers, there is usually not a great savings by having seller pay for title – for various reasons). RESPA prohibits a seller from requiring the use of a particular settlement agent. Bob was buying for cash, so RESPA did not apply.
In this case, Bob took my advice and had my office duplicate the work to be performed by the Seller’s closing agent, that is examine title and order local lien inquiries. When we examined title, I knew we had a problem.
The prior owner ostensibly lost their property in foreclosure. A Certificate of Title issued in August of 2008, and was recorded in September of ’08. As of September of ’08, looks like the bank owns the property.
Unfortunately, a Court Order was recorded in November of 2008 Dismissing the Foreclosure, Vacating the Final Judgment, Cancelling the Lis Pendens and Revoking the foreclosure Sale. In November of ’08, looks like the title is back with the prior owner.
Prior owner executes a Deed to third party in May of 2011. This Deed is recorded in August of 2011. In between execution and recording of the Deed by prior owner, the Court issued an Order Granting Plaintiff Motion to Dismiss the prior October 2008 Order which dismissed the foreclosure.
So, who owns the property? The Bank by virtue of the foreclosure? The recipient of prior owners Deed? The only way to straighten out and insure this mess would be through a quiet title action. This wasn’t just my opinion, this was the opinion of my title underwriters as well (I write with two and checked with both).
When I advised Seller’s closing agent of the issue, I was provided a title commitment which ignored the problem. The 24 month chain detailing conveyances regarding the property, ignored the deed from Prior Owner to third party. What was more annoying is that the title commitment listed a bunch of judgments against the prior owner as exceptions to Bob’s proposed title policy.
Bob opted not to close. If Bob simply proceeded without his independent investigation, he would own a headache. Even if his seller provided title policy paid his claim without objection, Bob would be covered for his purchase price, not for the expensive rehab he had planned.
Experience tells me that most REO listing agents are usually flooded with offers on their listings and rarely assert any pressure on prospective buyers. A few instances come to mind (two in particular) where an REO listing agent was exerting pressure to have paper work signed by the Buyer ASAP and where the listing agent objected to the Buyer using their own closing agent. In both cases, there was a serious title problem, which, in my opinion, would have been overlooked and written over at closing.