In most cases, you will write an offer on your local contract and the bank will negotiate from that until you have a verbal acceptance at which point, the bank will send their own addendum that will over-ride the local contract. Make sure that you read and understand the bank's addendum carefully. Very often, buyers are spooked by the bank's addendum and believe that it is totally in favor of the bank. I'm getting to the answer to your question.... I swear. The bank's addendum will basically say that they can kill the deal anytime that they want. Here's the answer to your question.... the bank in most cases, if not all cases has to give you free and clear marketable title. The title has to be free of any liens, judgements or encumberances.... the penalties that you speak of can fall into any one of those categories depending upon how far along they are in the process. It has been my experience that the only time the bank has ever killed a deal was because they couldn't give free and clear marketable title. Very often they will send these houses to auction if they have "aged out" of the marketing phase. At the auction, often times, the house will appear to have sold only to have the same issue raise it's ugly head. In some cases, the buyer will sign a hold harmless document and buy the house with a lien, judgement or encumberance. That is totally up to you.... if you were my customer, unless it was the deal of the century, I'd advise a pass before agreeing to accept a title with a "cloud".
I have sold over 700 REO properties in Miami and have seen it all. For the record, in my 22 years of working for the biggest bank in the business, they have killed exactly 3 deals over title issues... all in the last 2 years. They have delayed many, many transactions because they had to reforeclose or clear up a title. Most of the buyers hung around until the dust settled and closed with a free and clear, marketable title. By the way, most banks pay for the title policy in an REO transaction. They own their own title companies. The catch is that if you want them to pay for the title policy, you have to close with them. You most certainly can have your own attorney represent you in the closing. A little known fact is that you can also have your attorney handle the closing and sell you a title policy, but all of the title costs will be paid by you, not the bank. You just need to make sure that they know how you want to handle it, well in advance. My advice would be to let the bank close the deal and have your own attorney represent you. He can review the title work and be sure it is satisfactory to you and to advise you as to how to proceed.
Matt Murray CRS, GRI, CDPE
Master Broker's Forum
Pat Dahne Realty Group