Are you buying an REO home in New Jersey?

The procedure of buying bank-owned residential or commercial property in New Jersey has distinct obstacles, including buyer handling certificate of tenancy, the residential or commercial property being strictly "as-is", and minimal appraisal and mortgage contingencies. Find out 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 need to know when purchasing 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 different compared to buying other kinds of residential or commercial property and other standard sales, so we'll concentrate on 5 big things.

First, the lawyer review process is very different. Normally, in New Jersey, once it goes into attorney review, the purchaser's lawyer and seller's lawyer work out a "rider", which is basically an addendum to the contract, including any necessary modifications and some customary changes. There'll be a normal local attorney 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 truth, usually there will not 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, but there's not going to be any attorney for a purchaser's attorney like myself to negotiate with any unique modifications to the contract.

There's not going to be another lawyer that I could call and attempt to explain something unique about the deal. Any unique customizations are not going to get put in throughout the attorney review procedure. That also suggests that there's some traditional defenses I would normally include during lawyer review that I would not be able to add in an REO sale, so something along the lines of appraisal contingency protections, additional defenses for code violations, things associating with back due taxes that might can be found in the future, things of these natures, extra defenses I would include if I might work with another lawyer sort of like myself, they would understand.

With an REO, there's no other attorney and they're not going to be flexible on making any modifications throughout attorney evaluation. What will occur during lawyer evaluation though is that you'll sign the typical real estate agent contract and then there'll be like an addendum, like a bank addendum to the agreement with some pretty heavy handed terms beneficial to the bank. The lawyer evaluation is going to be more structured, it's more of a take it or leave it. We actually need to press for something, we can, but it's going to be more take it or leave it on the bank's terms in attorney evaluation. That's one distinction is the attorney evaluation process is just quite different and more strict with the buyer having less space to make any modifications to the initial agreement or the bank's addendum.

Another important thing to be aware of with the REO sales is that the timeframes are stringent. The majority of the sales that ... Most of residential sales, the due dates are flexible. They're not "time is of the essence". If an individual misses out on a deadline by a day, you submit your assessment demand a day late or your mortgage commitment's a day late or you pass the closing date a week, not truly a huge offer since the agreements are set up that way.

REO deals are not like that. The dates generally are established to be time is of the essence. On the buy side of the offer, you usually have more obligations. You got to do evaluations, you do your appraisals, you get your mortgage. It's more on your side, so you require to ensure you're on point with all your dates and all your timeframes due to the fact that there isn't going to be much flexibility developed into the contract.

REOs are likewise strictly as is sales. I understand regular sales, even in the base real estate agent agreement, paragraph 16 says, "Seller represents the sale is as is." All the sales are usually as is, but oftentimes the purchaser 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 requests for repairs. Once you start going down the sales procedure, buyer has an evaluation, something brand-new is discovered and you still might make a request for repair or credit or rate deduction. With the bank owned residential or commercial properties, they are really stringent as is sales.

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

They truly are stringent as is sales, and that is also some risk for you putting time into the offer because offered that it was an REO, the previous owner got foreclosed on, they might not have actually been taking the very best care of the residential or commercial property considering that they understood they probably were going to lose it to the bank. There might be physical concerns there. I imply most REO agreements do give 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 huge difference with these REOs sales is that the purchaser manages the certificate of tenancy and smoke certificate. Most sales, 99, if not 99.9% of the time, seller normally has the obligation to get the certificate of occupancy, which is when a city inspector, you call the city billing department, they send inspector out to the residential or commercial property. They examine for code infractions, habitability concerns, anything like that. They issue a certificate that states the residential or commercial property complies with a zoning code or something like that.

Normally seller duty. In the initial real estate agent contract, it is by default seller obligation. REOs is the opposite. They're going to push that onto the buyer and there is always heavy handed language therein. Again, you can't actually negotiate these things that well. If you're going to do the REO sale, there's threats here. They're either going to move the responsibility to the purchaser to pay for all the costs for the certificate occupancy and likewise smoke certificate, which is getting carbon monoxide gas detector, fire extinguisher, smoke detector, et cetera, to the buyer.

Now, the threat here, and various sale, I would have defense, I could build protections for this, however not for this kind of one, I would add something like buyer is ... Say, purchasers, "Okay, I'm going to take on obligation for CO. Even though it's not normal, 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 buyer is higher than 2,500 dollars, then the buyer can cancel if the seller won't begin the difference. Right? That's not going to fly in REO, that kind of protection. Right? You're going to need to handle the responsibility to get the CO. If their expenses turn up and they're more than 2,500, who knows what they might be, then if you do not finish the sale, you might lose your deposit. That's a threat that you take doing an REO offer.

The other thing I'm pointing out, the crucial distinction here is there's no appraisal contingencies. In the initial real estate agent agreement, the word appraisal isn't even discussed, right? There's no official appraisal contingency included in the real estate agent contract, so you need to add that in attorney review. As I pointed out in point one in this video, you can't truly make much modifications like using lawyer review riders for an REO deal. What about the appraisal?

For the appraisal, you're not going to get an appraisal contingency for an REO offer. What it'll boil down to relating to the appraisal is that if the residential or commercial property evaluates so low that your mortgage gets rejected, then you can still cancel the deal and you can still cancel the offer upon getting a mortgage rejection letter. If it's actually low, you're not on the hook to move forward with the offer and comprise the money immediately, so you don't need to comprise money, but it will just boil down to if your mortgage gets approved or not authorized.

The reason that is not great due to the fact that, say, you're putting 20% down, right? If it under appraises by, say, $20,000, you might still get approved for the very same amount of the mortgage and not get denied, but you just would have less equity in the residential or commercial property. Instead of being a 20% down mortgage on the appraisal value, basically under evaluated, maybe now you're approved for the exact same quantity, but it's only 15% down on the appraisal worth. Now due to the fact that you're not 20% down, you need to start paying PMI or become worse terms.

Again, you're not going to get an official appraisal contingency. You have less equity in the residential or commercial property, less terms, even worse mortgage terms. It's not an issue if you can get denied for the mortgage, however you might not get rejected. You still might get approved for your mortgage although it under evaluated, in which case then you're stuck to even worse terms and no chance to leave the offer and just kind of need to eat the lower appraisal in that scenario.

Okay, hope this video was practical. Let me know in the remarks any questions about REO sales, how those agreements work. If you require assistance with any realty deals, feel complimentary to reach out 201-389-8275.

This blog applies to buying 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 throughout 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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