A foreclosed home is one in which the home owner was unable to pay his home loan so that the lender took over home ownership through the foreclosure process. These bank owned properties are also known as REOs (real estate owned).
The process in Arizona is similar to that in other states and will be the basis for this article. When you work with a real estate agent he will write up your purchase offer with you on a standardized contract which was developed by the Arizona Association of Realtors. The contract allows the agent to customize the contract for your particular purchase and has many built in protections for both the buyer and the seller.
When you make an offer for a foreclosed property, you can expect to receive back from the seller (the bank currently owning the property) an addendum to the contract. These addendums are in essence a counter offer that the buyer must accept if he wants to purchase the property. In some cases the seller will negotiate with the buyer over these terms but most sellers expect the buyer to agree to their terms. We have seen a wide variety of addendums in the past year as we have worked with buyers. In all of them, many of the protections for the buyer in the standard contract are eliminated or modified. Here are some of the things we are seeing.
Inspection Period
In the standard contract, the inspection period lasts ten days from the date the contract has been signed by both parties. We have seen addendums that change that to be ten days from verbal acceptance of the contract and have even seen a five day inspection period that must be completed before the buyer signs and accepts the addendums.
Title/Escrow Company
The seller will typically require the buyer to utilize the escrow company of the seller’s choice. Usually using this company helps facilitate the timeliness of the transaction because the escrow company is familiar with the seller’s requirements.
AS/IS & Disclosures
When you purchase an owner occupied property, you will usually get a Seller’s Disclosure Statement. This will provide information about the property and a history of repairs done. When you buy a foreclosure property, the seller has not occupied the property and typically will not provide any disclosure statements. Additionally, the buyer is generally required to purchase the property in its current condition “as is” and the seller will not make any repairs. If something is missing such as a kitchen appliance or garage door openers the seller will not provide it. What you see is what you get. Read the addendum carefully to understand what the seller will be responsible for if the property is damaged during the escrow period. The escrow period spans the time from when the contract is agreed upon by both parties until the sale records (close of escrow).
Cost for Extension of Close of Escrow
Most of these addenda have a per diem charge if you need to extend the close of escrow beyond the date in the original contract. The most common reason buyers need to ask for an extension of the closing date is that the lender has not completed loan processing and delivered loan documents to title several days prior to closing to allow time for both the seller and the buyer to sign. We have seen costs ranging from $40 to $100 per day.
Loan Approval
The Arizona contract allows for a return of earnest money deposited by the buyer if after a good faith attempt to obtain a loan at prevailing market rates to purchase the property the buyer is unable to do so. Some addendums are limiting the buyer’s time to obtain loan approval to a set number of days from contract acceptance, for example 25 days. If the buyer does not notify the seller of his inability to obtain a loan within that time frame, he will forfeit his earnest money to the seller. This holds true even if the inability to obtain the loan had nothing to do with the buyer’s financial qualifications. We have seen loans turned down in the past few months for condo purchases because the community had too low a percentage of owner occupied units or the HOA was not financially solid or some cases for both of these reasons.
Tenants or Other Occupants
Most of these properties will be vacant; however, if you see evidence that someone is living in the property when you are viewing it and prior to writing an offer, you need to ask questions. Who is living in the property? If the property has been rented, what are the terms of the lease? We’ve seen addenda that indicate that the seller will not evict any occupants of the property and that it will be the responsibility or the buyer once he has purchased the property. You should also be aware that tenants have rights too. Be very cautious about writing an offer for a foreclosure property that is occupied.
What Does the Buyer Need to Do?
It is very important for the buyer to read the entire addendum provided by the seller prior to signing. If he has questions about the addendum he should ask his real estate agent for clarification. He should also verify that his real estate agent has read the entire addendum and made note of key dates.
