Foreclosure in Seattle>Question Details

Geoff Hinton, Home Buyer in Sammamish, WA

We currently have an counter offer from REO where they insist on using thier addendum. One item is "seller can cancel any reason. Is this a red?

Asked by Geoff Hinton, Sammamish, WA Thu Oct 13, 2011

flag? Our broker said this may not even be legal in Washington. Has anyone run into this? is it cause for alarm or just a minor risk that must be swallowed.

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Jamie & Sarah Reece’s answer
BEST ANSWER
Great question Geoff. We're seeing a great deal of concern about these REO addenda, and for good reason because as you read them you realize that you don't have the same buyer protections that the typical NWMLS contracts provide.

In general, they are a cost of doing business with a bank/REO. Think of the risk these addenda present as the counterbalance to the reward of the lower price you're paying for the property.

I would recommend against trying to negotiate these terms with the bank, especially if the property is a great value and/or you really want it. The rep for the bank generally wants "easy" more than they want $$.

Best advice - read the entire REO addendum carefully to fully understand the risks so you can balance it against the reward.

In my opinion, the cancellation clause isn't the real risk since it's rare. Look out for:

* De-Winterization Costs - are they going charge you for turning utilities on/off for the inspection?

* Delay in Closing - they typically have near punitive daily charges for closing late due to Buyer. You want to be sure that your lender is well aware of this before they agree to the closing date.

* Closing Date - depending on the bank, this can get tough since many have 30-45 closing dates from 'verbal' acceptance, however many buyers don't want to spend money on appraisals/inspection until they have written/official/binding acceptance - which can burn up 10 or more days of the closing timeframe at put you at risk of late closing.

* Contingency Time Frames - do they start at verbal or written acceptance? This is a big issue in your risk planning.

* Inspection Contingency - make sure have a clear option out if you don't like what you see. BUT... also keep in mind that despite what they say, you can get banks to do repairs. I've had 3 clients in the past 9 months get new roofs from the bank. It just needs to be need a big issue, and carefully presented/negotiated.

* Financing Contingency - make sure there are provisions for low appraisal that allow to get out.

Those are the big issues I often find, but it seems there are curveballs in each REO addendum.

Bottomline, you're typically going to put at risk about $1,000 of your money and a hand full of hair that could turn gray on way to a successful closing - but often you'll get back at least 5% of home's price in a better value.

Best of luck with this!

Jamie Reece
Managing Broker
Windermere/Northeast
Web Reference: http://www.reecehomes.com
1 vote Thank Flag Link Fri Oct 14, 2011
As you already noted, you have some excellent answers already, especially from Jamie. Just be careful and pay attention to the details.
0 votes Thank Flag Link Sun Oct 16, 2011
Yes, it's in most the bank owned addendums. I've sold over 50 of these in the last year & have still to run into a problem of the seller canceling an active purchase.
0 votes Thank Flag Link Fri Oct 14, 2011
Usually not a problem. I have done two where the bank needed to cancel for a reason beyond their control, but my clients still bought the homes once the banked resolved those issues. If they don't know what they are going to do to resolve a problem that comes up on their end, sometimes they cancel vs extend the contract, until they resolve that issue.

Good example...sometimes a State changes a Law that requires the bank to do something differently than was in place at time of contract and prior to closing. Sometimes they have to cancel the sale until their attorneys review that new law, and determine whether or not that new law affects this transaction and this closing.

They must, and should, leave their options open and have the right to cancel in case something like this comes up, and that is usually beyond their control. Still...as Phil said...most close just fine. I won't say don't "worry" about it. Just know it's not over until the property is recorded in your name. That is "the nature of the beast".

The price should be low enough to account for the increased level of risk on your part. One of the reasons "bank-owneds" usually sell for less than "fair market value". If you are buying it for 10% less than the comps, ask yourself if that saved money is worth that risk. Different buyers will have different answers to that question.

You get it cheaper for a reason...this is one of those reasons.
0 votes Thank Flag Link Fri Oct 14, 2011
Leslie, excellent point on the excise tax issue, although many of the sellers are exempt from the tax because they are federal entities. The counties really have to be losing a lot of money because of that.

Another term that is important is that typically the bank will retain an election of remedies in the event of a buyer breach. Thus rather than just being able to retain the earnest money, they can sue for damages, regardless of the choice made on the NWMLS form. I've never heard of one doing that, but they have that right. On that clause though I have seen banks that don't change that term.
0 votes Thank Flag Link Fri Oct 14, 2011
Hi Geoff,
This is a common frustration when purchasing a REO property. Unfortunately, many of the lenders are inflexible with accepting any changes or deletions to their addenda. The best way to protect yourself is to have the form reviewed by an attorney so that you know exactly what you are signing and then you can decide whether you want to proceed. Another important thing to look for in these addenda is verbiage that says the buyer will pay for "transfer taxes" because often times the buyer ends up agreeing to pay the excise tax (customarily a seller tax and 1.78% of the purchase price) without even knowing it. Again, the important thing is knowing exactly what you are signing and making sure you are comfortable with it.
Web Reference: http://thereedteam.com
0 votes Thank Flag Link Fri Oct 14, 2011
As others have noted, this is a very common term in the contract. I believe the main reason for it is a title issue might be discovered after the house is listed. I did touch on the existence of such terms in this blog piece more than two years ago.

http://blog.seattlepi.com/realestate/2009/08/26/real-estate-…
0 votes Thank Flag Link Fri Oct 14, 2011
Hi Geoff,
Great question!
I deal mostly with FNMA. They have an addendum that they insist you sign with no variations. You have two options. Sign as is and close the sale. Or decline the signature and lose the home.
Good news? Several million homes close every year with similar language!
Phil
0 votes Thank Flag Link Fri Oct 14, 2011
I might add that if they do that, they have to pay your out-of-pocket expenses. They might agree to that change. All preprinted forms are touted as non-negotiable but my experience is that they almost always can be negotiated if you have something the other side wants.
0 votes Thank Flag Link Fri Oct 14, 2011
It's standard in all of the bank's addendums (from my experience). Sometimes title issues pop up and hold up closing on the seller's end, where they legally can't sell the property until the issue is resolved. I've seen deals get cancelled for this reason on the seller's end...but not often. They just want to have the right to cancel in certain cases, but as the others have stated, they are looking to get rid of these costly assets, not to hold up sales.
0 votes Thank Flag Link Fri Oct 14, 2011
Thanks for the answers. This really is a great community and I appreciate it.
0 votes Thank Flag Link Thu Oct 13, 2011
Geoff,
I can't speak to the legality, but I've not seen that form before. You or your agent should have it reviewed if it concerns you. Since it's an REO and assuming it's vacant, if this is a major bank your agent can research to see how many of their other REO's have closed.
If you want the property bad enough you can accept it, but hold back on making plans to move until it's closed or you can strike that line and see what their reaction is or again seek legal advice and proceed as they suggest.
0 votes Thank Flag Link Thu Oct 13, 2011
All the bank addendums I can remember have that clause in it. The banks addendums cover the bank as much as their lawyers could come up with. If you want the property, you have to play their game. Just remember in most cases, it is in the bank's best interest to get the property off their books so they want to close the deal too and will only cancel it in unique situations.

Good Luck!
0 votes Thank Flag Link Thu Oct 13, 2011
Many times the bank addendums are slanted towards the bank , but in my experience it is something you will probably have to agree to . The bank wants to dispose of the property as soon as possible, so they are not looking for ways to kill the deal, it is just their lawyers who drew up the addendums way of protecting the banks interest. As long as you are thoroughly aware of what the language in the addendums say and don't default on the agreement you in my opinion should be fine.
0 votes Thank Flag Link Thu Oct 13, 2011
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