When it comes to REO (Real Estate Owned) addendums, we’ve all seen them. They all seem to have the same general points which, of course, favor the seller. When representing the buyer, here are 10 points look for in a REO addendum (1-5 in this blog and 6-10 in the next). Note that they are in no particular order and although each addendum is attached to the Purchase and Sale Agreement for the same reason, every addendum can be very different. Hence, it’s important to review the addendum as it applies to each transaction. All of the REO addendum’s terms control over the standard Purchase and Sale Agreement’s terms (i.e. they win) so it’s important to understand exactly what they mean…and of course, consult with a real estate attorney before signing.
- Almost every REO addendum contains a paragraph making the closing date “time is of the essence”, with a per day penalty of usually between $50 -$150. So pay close attention to the closing date. Of course, with this language, there’s no moving the closing date out. In fact, if the transaction doesn’t close on time or on the contract closing date, the buyer will be technically in default. Without the “time is of the essence” language, attorneys can argue that the buyer has a “reasonable time” to close from the closing date and this can equal 2 or even 3 weeks. REO companies don’t like this…
- REO addendums always contain an “as-is” paragraph indicating that there are no warranties or representations whatsoever, etc. All the more important for the buyer to conduct a thorough and comprehensive inspection. For example, in the winter months buyers need to be aware of dewinterizing issues. We have recently seen, that the buyers, via the REO addendum, are responsible for the costs associated with rewinterizating after the inspection period is completed. Interesting.
- REO addendums will sometimes have a paragraph making the buyer responsible for conveyance taxes. At 1% of the purchase price, this can become an expensive oversight for most buyers. It can sometimes be negotiated out, but not always. It’s important to also note that, if found out too late, a requirement that the buyer has to pay the conveyance taxes can cause a disclosure issue with buyer’s lender and delay the closing. Because of the delay, you may now be dealing with late fees as noted in paragraph 1 above…so this can get messy.
- In Hartford County under the standard realtor condominium rider, any special assessments owed at the time of closing will be paid in full by the seller (it’s different in each county so be sure to know when applies to your transaction). These REO addendums, at times, will amend that paragraph and the assessments will only be brought current and not paid in full. This is important when the assessments are in the thousands and the buyer expected the seller to pay. Good to know early in the transaction, right?!
- Pursuant to some REO addendums, title is transferred via Special or Limited Warranty Deed or Quit Claim Deed (meaning not a Warranty Deed). These forms of deeds can limit seller’s exposure from a title defect as the seller cannot be held responsible for most title issues post closing. All the more important for a buyer to obtain an owner’s title insurance policy. With that said, most of the REO addendums will allow the buyer to obtain an owner’s policy through the seller, and at seller’s expense. Sounds great, right? The problem is that some seller’s attorney’s offices will only conduct a one-owner title search, and therefore, will not pick up previous title defects. All title claims can be messy and should be discovered prior to closing. So why make the seller’s title issues becomes the buyer’s title issues. One solution is to allow the buyer to obtain the policy through seller, but have buyer’s attorney do a thorough and more extensive title search. Reviewing the type of title policy issued by seller is important as well as it may not be an expanded policy.