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A foreclosed home is a home where the homeowner is unable to pay off their home loan until the lender takes ownership of the home 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 of this article. When you work with a real estate agent, he or she will write an offer to buy with you under a standardized contract developed by the Arizona Association of Realtors. The contract allows the agent to customize the contract for your purchase and contains many built-in protections for both the buyer and seller.
When you make an offer for a foreclosed property, you can expect to receive an addendum to the contract from the seller (the bank that currently owns the property). These extras are in essence a counter offer that the buyer must accept if they want to purchase the property. In some cases, the seller will negotiate these terms with the buyer but most sellers will expect the buyer to agree to their terms. We’ve seen a variety of additions in the past year as we’ve worked with buyers. In each, many of the buyer’s protections in the standard contract were revoked or modified. Here are some of the things we see.
inspection period
In a standard contract, the examination period lasts ten days from the date the contract is signed by both parties. We’ve seen additions that change that to ten days of oral acceptance of the contract and we’ve even seen a five-day inspection period that must be completed before the buyer signs and accepts the annexes.
Address/guarantee company
The seller will usually require the buyer to make use of the escrow company of the seller’s choice. Using this company usually helps ease the timing of the transaction because the escrow company is aware of the seller’s requirements.
AS/IS & Disclosures
When you buy an owner-occupied property, you will usually be given a Seller’s Disclosure Statement. This will provide information about the property and the history of repairs made. When you buy a foreclosure property, the seller has not occupied the property and will not usually provide any disclosure statements. In addition, the buyer is generally required to purchase the property in its current “as is” condition and no repairs will be made by the seller. If something is missing like a kitchen appliance or garage door openers, the seller won’t provide it. What you see is what you get. Read the appendix carefully to understand what the seller will be responsible for if the property is damaged during the warranty period. The warranty period extends from the time the contract is agreed upon by both parties until the sale records (the warranty closes).
The cost of extending the warranty closure
Most of these add-ons have a daily fee if you need to extend the warranty close beyond the date in the original contract. The most common reason buyers request a closing date extension is that the lender has not completed processing the loan and has turned over the loan documents to the property several days before closing to allow time for both buyer and seller to sign. We’ve seen costs from $40 to $100 per day.
Loan approval
The Arizona contract allows for the return of the earnest money deposited by the buyer if the buyer is unable to do so after a good faith attempt to obtain a loan at prevailing market rates to purchase the property. Some extensions limit the buyer’s time to obtain loan approval to a set number of days from acceptance of the contract, for example 25 days. If the buyer does not notify the seller of their inability to obtain a loan within that time frame, the seller will lose their earnest money. This is true even if the inability to obtain the loan has nothing to do with the buyer’s financial qualifications. We’ve seen loans declined in the last few months for condo purchases because the community had a very low percentage of owner occupied units or the HOA wasn’t financially strong or in some cases for both reasons.
tenants or other occupants
Most of these properties will be vacant; However, if you see evidence of someone living on the property while viewing it and before writing an offer, you need to ask questions. Who lives on the property? If the property is rented, what are the rental conditions? We have seen additions that the seller will not evict any occupants of the property and that it will be the responsibility or buyer once the property is purchased. You should also be aware that renters have rights, too. Be very careful about writing an offer for an occupied mortgage property.
What does the buyer need to do?
It is very important for the buyer to read the entire supplement provided by the seller before signing. If he has questions about the extension, he should seek clarification from his real estate agent. He should also check that his real estate agent has read the entire appendix and recorded key dates.
