Bank Owned Homes - Double Check The paperwork!
Double Check that Closing Statement!
In my Southern California Desert marketplace the vibe is back. Lower priced short sale and REO (bank owned) properties are humming. We are getting great call and showing activity and about half the time there will be multiple offers on properties like these. It is refreshing to see this level of activity after such a slow start in the first month of the year.
That is the good news.
The bad news is the new level of errors I am spotting. Virtually every HUD1 (closing statement) I see contains a mistake. You must remain very focused on the paperwork in these transactions or you stand to lose big.
Looking at the situation and trying to determine the root cause of this I identify several issues.
a) Long distance escrows – typically in Bank properties the bank has pre-negotiated contracts with certain escrow and title companies. In most cases they are not local. There is no relationship there for me to rely on as I do when the escrows are with local companies. Talk about feeling like a number! To be fair I have had some excellent escrow officers in bank transactions but the norm is average to sub- average.
b) The sheer volume of transactions. This applies to both the listing agent in the transaction and the escrow companies. They are handling so many files the chances for errors go way up. One agent in my market place has 169 REO listings. Need I say more?
c) The complexity of these deals. Everyone wants a good deal and the bank owned properties, at least in my market place, are often the best deals you can find. However, this deal comes with a price. The very first thing that typically happens in a bank owned home transaction is that the purchase offer is followed up with a complex “Bank Addendum” these range from 3-21 pages in my experience. Translating all of that information and comparing it to the purchase contract is essential but not always easy. The opportunity for a misunderstanding goes up exponentially.
As with any contract you should read it but in this case you MUST read it. Several of the items that come up time and time again in my experience are:
I) Repairs – the bank simply won’t do them. You may have asked – you may have written it into the contract but read your addendum carefully the bank may have simply excluded them from the agreement. A good home inspection is crucial to understand what you getting into. Also, a home warranty is highly recommended, at least for the first year. These will typically cover the systems in the house for one low service call fee. I think these are must for HVAC and Pool equipment and not a bad idea for bigger appliances such as fridges.
II) Inspection Periods – Banks like to shorten these. I have seen them try to cut them as low as 5 days.
III) Non refundable deposits. – You sign the addendum and that’s it. NO refunds on the deposit regardless of what you find in your inspections
IV) Misc. Fees – These can be any amount for any reason. I have seen extra fees for as little as $15 and as much as $550. Typically these are nothing but extra revenue for the bank – be sure you know and look for hidden extra fees in the addendum.
V) HOA fees – Be absolutely certain, if you are buying in a community that has an association, that the Bank is paying the full amount of the arrearages on the property you are buying. Banks are starting to dig in their heels and limit what they will pay the HOA for past fines and penalties. HOA’s are finding it pretty hard to fight the big faceless nameless banks and are simply attaching the fees to the property for the new owners. Not a very nice welcome gift.
The rule of the day is caution and diligence. These deals don’t come on a silver platter there is homework to be done.