What do you need to know about REO contracts? They change everything.
An REO contract is the contractual agreement between the purchaser of real estate and the Seller, where the Seller is generally a lender or other associated commercial entity having acquired title through foreclosure (or Deed in lieu of foreclosure). These contracts are seen as distinct from “ordinary” contracts because they are, in fact, most often radically different from “ordinary” contracts.
My offices are located in South Florida. There are a handful of “standard” contracts that are regularly used by Realtors in the community. In general, these contracts are prepared by the Florida Association of Realtors, the Florida Bar, local real estate boards, or a collaboration of the foregoing. These contracts have many provisions in common, and in most cases terms are very similar, although there are certainly differences between the various “standard” contracts. In my opinion the “standard” contracts try to strike a balance between the rights of both buyers and sellers. Perhaps more importantly, your local Realtors are familiar with these contracts and know how they work.
An offer to purchase REO property is generally prepared using one of the common form contracts. The REO seller, however, will generally require the use of a multi page addendum. The provisions of the addendum supercede and replace the terms of the “form” contract. The changes are substantial, and their effect significant.
To write a comprehensive piece on how REO addenda change common provisions and practice would require several pages be written about each of the numerous REO addenda I have read. Instead, I can illustrate the point by giving a few examples of changes I have seen.
Drastic changes are often made to the inspection provisions of contracts. It is somewhat humorous that many REO sellers require the use of the FAR/BAR AS-IS standard form contract because their required addenda often gut the most salient terms of the contract. In the basic FAR/BAR As-Is contract, a buyer has a certain period within which to inspect the subject property. If the property does not meet with buyer’s approval, buyer may cancel the contract within the inspection period, and upon so doing, all deposits shall be returned.
I have received addenda which provide the Buyer acknowledges they have already had adequate opportunity to inspect the property, and that Buyer accepts the property in its present As-Is condition (even though no inspection has taken place). The Buyer has essentially waived their right to an inspection.
The addenda are often long, and the wording often complicated. Buyers, and even Realtors, cannot be reasonably expected to appreciate the changes worked by the addenda. The sad part is that in one case a Buyer’s Realtor explained to me, “But I was told this was still an As-Is contract.” Yes. You are taking the property As-Is, with no right to inspect. Clearly the agent’s understanding of “As-IS” was based upon the standard contracts he was familiar with, and not with the REO Addendum’s meaning.
On more than one occasion I have been presented with the situation where the Buyer submitted an offer on an As-Is form with a 10 or 15 day inspection period. The Buyer may be verbally advised that their offer is “accepted” and that an addendum will be forthcoming. The Addenda sometimes provide time periods start running from the time of “Verbal acceptance.” In multiple cases, the addendum effective date was several days BEFORE Buyer received the Addendum. Often, inspection time periods have run or are about to run by the time the Buyer signs the Addendum.
Those of you familiar with foreclosure and condominiums may be aware that per Florida Statute (F.S. 718.116) foreclosing lenders are liable to the condominium associate for the lesser of 12 months association fees or 1 percent of the mortgage amount. I have seen REO Addenda that provide the seller will not be responsible for any association fees accruing prior to the Seller acquiring title to the property – even though Florida Law holds them liable for 1 year or 1 percent. In this case the Buyer will be stuck. I have been involved in negotiations with associations on behalf of buyers in this situation.
The “standard” contracts have a general procedure wherein the buyer goes to contract, must make application for financing, and (in general) has a period of time within which to obtain a loan commitment from a lender. If the commitment is not obtained, generally either party may cancel the contract. In the REO contract, the standard provisions are often greatly changed, from the extreme of totally eliminating the financing contingencies, to the more moderate changing of time periods.
Seller’s Right tom Cancel
One of the basic reasons for parties to execute a contract is so the parties can each be reasonably assured the other party will perform the contract, i.e. buy or sell the subject real property. Many, perhaps most, REO addenda provide the Seller has an absolute right to cancel the contract at any time and provides the Buyer has no right to sue for damages.
In short, REO Addenda can change anything and everything regarding your contract for purchase.
Read your addenda carefully, and if you don’t understand them, get help.
Closing Express, Inc.
Damiani & Weissman P.A.
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 .