FHA loan for Foreclosure property?

Asked by Chad Benson, Chicago, IL Thu Jan 10, 2013

Hi - I am looking to purchase a bank-owned property (two-flat) and have been communicating with the bank prior to it being listed for sale. The home was just appraised within FHA borrowing guidelines ($528k) for multi-unit, and I am leaning towards that option. What I want to check here is if a seller of a bank owned property can legally refuse an offer because the loan is an FHA, or if it's legal for them to try to persuade you away from an FHA loan. In this particular property, the RE agency representing the seller - the bank - is also representing me as a buyer (that was how they wanted it). Any advice?

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Don Pasek, , Chicago, IL
Thu Jan 10, 2013
Hi, Chad:

Before I get around to answering your question, I'm wondering why you decided to agree to use the same agent as the seller ... you mention "that was how they wanted it" but don't say whether the "they" is the seller or the seller's broker. In either case, you have the right to use your own broker to advise you. If the listing broker told you otherwise, that broker misinformed you.

When the seller's broker and the buyer's broker are the same person (or company) there is an inherent conflict of interest that puts the buyer at a disadvantage. This is because the seller typically gets a lot of advice about the proper asking and selling prices when meeting with the listing broker before the property is on the market. The buyer, on the other hand, only receives advice upon deciding to make an offer on a particular property.

Illinois law calls the situation you are in "Dual Agency," though this is a misnomer, since it implies that a single broker is representing both the buyer and the seller. In fact, the broker in such a transaction represents neither party.

What's important to you is that Illinois real estate law prohibits a broker in a dual agency situation from advising either party on what price to offer or accept. That means the listing broker, acting as a dual agent, cannot legally give you any advice on the value of the property or what to offer the seller (though that broker likely has already given that advice to the seller). A dual-agency broker can only process paperwork and pass messages between the parties.

So hopefully now you see why I asked why you decided to agree to this, since it puts you at a great disadvantage. You really ought to get your own broker working for you ... it doesn't cost you a thing, since your broker will be paid in a cooperative commission from the seller's broker.

Getting back to your question: you asked whether the seller of a bank-owned property can refuse an offer based on an FHA loan. The short answer is yes, any seller can legally refuse to sell a property based upon what the seller considers unfavorable financing or purchase terms.

FHA loans were designed to accommodate buyers who otherwise would not qualify for a mortgage due to their income or financial history. They are the least desirable type of financing, save perhaps VA loans or other types of "100%" financing. Given a choice, sellers will almost always accept an offer using conventional financing or cash before they will accept an FHA offer.

Banks in possession of foreclosed properties typically want the best financial terms possible for the sale, so that they can plan to have the liability off their books as quickly as possible. That's why they vastly prefer cash offers on foreclosure properties. They don't want to deal with the uncertainty of mortgage approvals (ironic, huh?).

You mentioned that the "home was just appraised within FHA borrowing guidelines ($528k) for multi-unit." You also mentioned earlier that the building was a two-flat. I checked the FHA loan limits online and found that the current limit for two-flats in Cook County, IL is $524,850, or $3,150 less than what you say the appraisal was.

This less than 1% difference may not seem significant to you, but it could at least delay your loan commitment, if it didn't prohibit it altogether. Also, FHA loans require an inspection to certify minimum habitability standards (think grounded outlets, solid roof, etc.) which could require the seller to do repairs before closing. Banks typically don't do repairs to foreclosed properties. Those two things my opinion, could be what are keeping the seller from accepting your offer based on an FHA loan.

One last thought: where is this $528,000 two-flat located? Will the income from the second unit be sufficient to make it worthwhile at that price? A good REALTOR can help you to analyze financing options and potential returns. Get one to represent you before signing any papers!
0 votes
Thanks for the updates and clarifications, Chad. Indeed if you are represented by another agent at the same real estate company this technically does not constitute dual agency, but I'd still be wary.
As you rightly mention, there's a financial incentive for the agents to close the deal "in-house." Your agent should show you data about recently closed transactions of similar properties in similar physical condition in the nearby neighborhood. This will help you to decide whether the appraisal you mention is accurate and your purchase price is solid.
Thanks for letting me help you to figure out your plans. Best of luck in your new home!
Flag Fri Jan 11, 2013
Some more details: The two flat is located in North-Center. We will not be renting out any units - the plan is to use it as a single-family, as it is in a very good school district. The school district is our top priority, for our children. Thanks for providing the updated FHA guidelines. We do not have the ability to put down 20% on a conventional, and FHA is a good option for us. We are hoping to negotiate the price to a range where we can qualify for and put down 3.5% for FHA, and if needed bring a bit more cash to the table to cover the difference. Hope this helps clarify the situation.
Flag Fri Jan 11, 2013
Hi Don - thanks for the detailed response. Much appreciated. I wanted to provide a few more details so you have the full picture:
The property we are considering is "pre-market"; the bank hasn't listed it for sale as yet, and we were "lucky" to find it. The bank directed us to their RE agency - whom we have been dealing with. We were told that the property is habitable, and therefore, open to financing. The property has been closed and we had to get special approval to see the property as it is not yet listed for sale. We absolutely love the area, and feel this could be a very good option for us. We are not in a dual agency situation - let me explain: the seller (bank) is being represented by agent A from a specific RE agency. In order for us to get a "first-look" at the property, we were told that agent B - from the same RE agency - would need to represent us as the buyer. So, same agency, different agent. My understanding is that this is to maximize profits for the RE agency.
Flag Fri Jan 11, 2013
Ivan Sagel, Agent, Chicago, IL
Fri Jan 11, 2013
Hi Chad,

Yes, the bank can go with what they feel is the best offer. Often, the bank will go with a cash offer that is less than the financed offers they recieve. A cash offer with no contingencies will close quicker and with no risk of the deal falling appart due to financing or inspection issues.

Best of luck,

Ivan Sagel
0 votes
, ,
Thu Jan 10, 2013
A bank could refuse an FHA offer if they believe that the property will not qualify - if the property is in disrepair or if there are other issues. They may not put that in writing - but they could just accept another offer that is more "fitting"
If the home was already appraised for FHA financing then the bank should have no issue with this - and better yet you could use that appraisal
I would love the opportunity to compete for your business if you are going to finance the property
Sam Sharp
Senior VP of Mortgage Lending
Guarnateed Rate
773 290 0455
0 votes
Riccardo War…, Agent, Bolingbrook, IL
Thu Jan 10, 2013
They cannot legally refuse an offer because it is FHA. As far as them trying to persuade you away...... I'm not sure of that being actually illegal. Buyer shouldn't care where the funds come from as long as they come.
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