Definitions REO: Real Estate Owned property is a property that a mortgage lender takes back into its ‘care’ as a result of a foreclosure on a home that has not yielded a buyer during a foreclosure sale.

Selling REOs

and

HUD Foreclosures

By Mike Phillips

Definitions

REO:

Real Estate Owned property is a

property that a mortgage lender

takes back into its ‘care’ as a result

of a foreclosure on a home that has

not yielded a buyer during a

foreclosure sale.

Asset Recovery Specialist

The Listing Agent who handles the

listing for the seller.

REO/Asset Manager

Employee of the REO company

who handles all aspects of the

transaction on Seller’s behalf.

BPO

Broker Price Opinion – similar to a

Competitive Market Analysis, but designed for

companies as opposed to individual

homeowners and are conducted by a local

real estate agent.

Typically combines drive-by exterior

examination, external data sources, previous

sale data, property assessment data, recent

comparable sales and current neighborhood

listings, as well as a photograph of the subject

property.

Deed of Trust

Kansas calls it a mortgage, but Missouri

terminology is a Deed of Trust.

Bankruptcy

The one thing that can stop a

foreclosure.

Short Sale

When the outstanding obligations

(loans) against a property are greater

than what the property can be sold

for. Sometimes the lender agrees to

accept this smaller sale price and the

borrower can subsequently avoid

foreclosure.

Deed in Lieu of Foreclosure

The lender agrees to allow the

borrower to “give the property” to the

lender and the borrower can

subsequently avoid foreclosure.

This is seldom practiced.

Redemption Period – KS Only

Time allotment in which the borrower

can still pay off what they owe and

avoid foreclosure. Based on a

multitude of factors and the time

varies. Seller could still list the

property for sale and the proceeds

would go to the court. Banks can

change their mind on this at the last

moment.

Notice

Foreclosures must be advertised to the

public as a notice that a sale will be

conducted at the courthouse. If county

population is 50,000+ it must run for 20

consecutive days. When population is

under -50,000 a weekly notice is required

for 4 consecutive issues.

Trustee’s Deed - Type of deed issued to

buyer at foreclosure by trustee. A deed

conveying land ownership executed by

the trustee who holds the land in trust

Sheriff’s Deed - A deed given by court

order to convey title to property that has

been sold to satisfy a judgment of

delinquent taxes.

General Warranty Deed - A deed in which the

grantor warrants title against all claims,

offering the greatest guarantee of protection

of any type of deed, and which is used in most

real estate deed transfers of title

Special Warranty Deed - An agreement

whereby the current owner/seller guarantees

he has done nothing that would impair or

cloud title, but does not make any guarantee

for what occurred prior to his ownership of the

property

Quitclaim Deed - a legal instrument which is

used to transfer interest in real property. The entity

transferring its interest is called the grantor, and when

the quitclaim deed is properly completed and executed

it transfers any interest the grantor has in the property

to a recipient, called the grantee.The owner/grantor

terminates (“quits”) any right and claim to the property,

thereby allowing the right or claim to transfer to the

recipient/grantee.

Unlike most other property deeds, a quitclaim deed

contains no title covenant and thus offers the grantee

no warranty as to the status of the property title and

there is no guarantees that the title is free and clear.

Brace yourself for a different

kind of real estate game-

This is not your father’s

Oldsmobile!

Rule #1

He who has the gold makes the rules.

Prepare yourself for having no control

over the process! The Lender has total

control over the process, so remember it

and inform your buyer of this.

Rule #2

This is a horse of a different color.

Working with these properties is

nothing like working with traditional

sales. You must release yourself of

an old mindset.

Rule #3

Tell your buyers to fasten their seat

belts.

If they’re properly briefed about the

process beforehand then all of you

will have a much smoother

transaction.

The Seller’s

Side of the Equation

The Process of Foreclosure

Bank gives notice to borrower via

Certified Letter.

Bank may work with borrower to

resolve the situation.

A random agent will be assigned

by the lender to conduct a BPO.

Short Sale:

Might be considered if the

property has been on the market for a

while and offers are lower than list price.

If so, the Bank instructs the

Title Company to prepare a HUD.

The Bank may change its mind

at the last second.

If resolution is NOT possible, the

following begins:

Kansas:

Right of Redemption period may apply.

Homeowner could list and attempt to

sell, proceeds go to the court.

Bank may rescind this permission up

until closing.

Missouri:

The Bank sends a Trustee to the

courthouse steps. They have a beginning

figure in mind that includes the mortgage

balance, attorney fees, interest, penalties,

etc.

If there is no buyer at the courthouse

steps, the Bank Trustee buys it and now

it’s an REO.

The Buyer’s Side

of the

Equation

Where do you find a list of REO’s?

~ Heartland MLS - Advanced Search, Type

of Ownership or scroll down to the

remarks and type in “foreclosure.”

~ The Daily Record (Missouri)

~ The Legal Record (Kansas)

~ Internet:

Johnson County Kansas District Court

Public Record

HUDHOMESTORE.com (a nationwide

website)

Types of REO’s

Banks

HUD (see later section)

MI and PMI companies

Conventional

Selling “Traditional Listings” versus selling

REO’s

What’s the same?

~Basic Contract is used (the KCRAR form)

~Inspection period normally 10 days, but many

want 5 days or less

~Earnest Money and Proof of Funds presented

at time of contract

~Title is clear at time of sale

~No encumbrances can remain on the title,

including taxes, HOA, etc.

~Listing Agent works for the Seller, Buyer’s

~Agent works for Buyer

What’s different?

~Addendums are provided by the bank

(could be before the offer or after)

Don’t use KCRAR addenda except for

“Additional Disclosures as Required by

State or Federal Law”.

~Properties are “AS IS”

~Inspections are for knowledge only (no

repairs will be done by seller)

~Earnest Deposit becomes NON-

refundable after inspections

More Differences…

~Per Diem charges apply if closing isn’t

on time – could be $50-$100 daily paid

by buyer!

~No Seller’s Disclosure available.

~Longer waiting period to get things

done.

~ Most Asset Managers are handling 200

to 300 properties in several states.

~Some banks have deed restrictions on

properties because of potential fraud.

Buying on the Courthouse steps:

Buyer can purchase properties either on the

Courthouse steps or through a REO company

later.

Buyer must have a letter of credit for

courthouse purchases. (Or cash, cashier’s

check, money order)

Verify the legal description! It’s crucial to

ensure the legal description matches the

buyer’s expectations. Mistakes are not

uncommon.

The Process:

Many Asset Managers require for offers to be

submitted on their “Offer Worksheet” which

contains basics such as price, terms,

concessions, etc. This includes Counter Offers.

Once the REO company accepts the offer or

counter offer, all paperwork is sent to them for

signatures. Typically, acceptance is verbal and

then signatures are taken care of afterwards.

It is extremely rare for a verbal “OK” to be

rescinded.

Remember, many Asset Managers have

hundreds of properties and agents to

oversee. Calling multiple times will only

serve to slow down the process.

Loan processing for your buyer must be

started immediately. Don’t waste time!

Read the Bank’s Addenda very carefully to

determine if a per diem penalty will be

charged for a delayed closing. (Could be

$50-$150 per day!)

Termites:

REO companies will only address LIVE

infestation.

Contract Names:

Never try to change a name during the

course of the transaction. “Assigning

contracts” is prohibited, so make sure the

right names are in place from the

beginning.

Escrow:

Closing will be at the seller’s chosen

escrow company, like it or not. This isn’t

traditional, but with REO’s it makes more

sense.

The Escrow Company information will be

included with the signed contracts. The

Listing Agent may not know the name of

the Escrow Company until then, either.

Inspections and Utilities:

You MUST get permission prior to

scheduling your inspection.

Electric may be on, but water may not and

the property may be winterized. Be smart

and check out the property the day before

your inspection to be certain utilities are on,

or you may have to pay re-inspection fees if

your Home Inspector has to return a second

time.

Condition:

Properties are sold “as is.” Typically, the only

items the REO company will fix are those

required by the lender. The company will not

approve repairs for anything “cosmetic, wear and

tear,” etc. However, you could raise the price and

have the seller credit back for the repair, but it’s

unlikely they will be completed prior to closing.

Keep in mind there is only so much “room” in the

sales price vs value to build in repair concessions.

The REO/Asset Manager has caps on concessions

they are allowed on each file.

MORTGAGE FRAUD

The FBI defines mortgage fraud as “a material misstatement,

misrepresentation, or omission relied upon by an underwriter

or lender to fund, purchase, or insure a loan.”

KANSAS LICENSE LAW

K.S.A 58-3062(a)(12) failing to express the exactagreement

of the parties in the contract.

K.S.A. 58-3062(a)(14) fraud and misrepresentation

K.S.A. 58-3062 (a)(15) Representing to any lender,

guaranteeing agency, or any other interested party, either

verbally or through the preparation of false documents, an

amount in excess of the true and actual sales price of the real

estate or terms differing from those actually agreedupon.

MISSOURI LICENSE LAW 339.100 (4)

Representing to any lender, guaranteeing agency, or any other

interested party, either verbally or through the preparation

of false documents, an amount in excess of the true

and actual sales price of the real estate

or terms differing from those actually agreed upon.

RED FLAGS to Mortgage Fraud

● Assurances not to worry about the appraisal.

●Silent Second Mortgages, Texas Earnest Money,

(i.e. a seller carry-back that is forgiven at closing)

● Certain items are omitted from the closingstatement.

● Advance down payment amountswhich

are falsely represented as being paid by the borrower.

●Promises to the buyer that the property willbe

leased or rented in behalf of the buyer and the

loan payments, insurance, etc. will be covered.

● A new immigrant is told to use someoneelse’s

social security number.

● Quit claim the property back to seller or

co-conspirator without notice to orpermission

rom the lender.

● Resubmission of the listing to MLS for ahigher

list price so it will coincide with the inflated contract.

Red Flags, continued

●There are an unusual number of addenda

to the purchase contract

●Last minute invoices are submitted to the

closing agent

●Unusual expenses are paid by the seller, such as

large repair charges, and/or charitable donations

●Lenders or mortgage broker not willing to

commit something to writing

●Mortgage broker does not want REALTOR to

contact lender or investor to alleviate concerns

●Statements that the property will be owner

occupied when in fact it will not.

SAFEGUARDS Against Mortgage Fraud

●Make sure that everything is shown in the body

of the contract. Everything about the financing

must be shown on the Financing Addendum,

not on separate pieces of paper.

●Make sure everything is showing on the closing

statement

●Review the borrower’s Good Faith Estimate

(federal law requires the lender to provide this

to the borrower within 3 days of application)

●Review the HUD 1 before buyer closes and/or ask

someone else to review it for you.

YOUR PROCEDURES To Stop MortgageFraud

Say, “This may not be fraud, but it looks like it so

I will not participate.” Tell the buyer and/or

seller the same thing.

Report event to your broker.

Report event to appropriate regulatory

agencies.

HUD Appraised Values

Recent changes by HUD that involve

appraised values …

…not being disclosed, as well as the ability for buyers

to obtain new appraisals, have raised some questions

regarding bid submission for FHA purchases.

When conducting training or answering questions

from selling agents, NLBs need to keep in mind that

per Mortgagee Letter 2013-44, the maximum FHA

mortgage amount is “Limited to the lesser of (a) the

contract sales price (b) the new appraisal value, or ( c)

the initial list price of the HUD REO property.”

Continued

Not knowing the appraised value should not

make a difference. Since the maximum FHA

mortgage amount is limited to the lesser of the

3 items mentioned above, if a buyer bids over

the initial list price then they will be required

to bring funds in the amount of the overbid to

closing.

Continued

If HudHomeStore.com has a property over the

appraised value, and the buyer submits an offer

above appraised value, the lender will be able

to order a new appraisal. However, brokers

need to understand that in this scenario, if the

bid exceeds the initial list price then finds in

the amount of the overbid will be required at

closing.

Continued

Since properties may be listed above the

appraised value in markets that are

increasing, Morgagee Letter 2013-44

allows buyers to submit competitive offers

and still be able to use FHA financing.

Once you have a ratified contract, you must

get the Earnest Money to the Listing Agent’s

Office and get an Earnest Money receipt.

The Listing Agent’s office will send the receipt

to HUD and get the actual check to the title

company when instructed to by HUD.

KEEP YOUR RECEIPT!

Neither the Buyers Agent or the new

home owner may have a copy of the HUD key.

The new buyer must be prepared to switch

out the door locks after closing.

Call the listing agent after closing and they

will pick up the yard sign, lockbox and key.

The End