“They Can’t Do That!!” (Can They??)
Add one more item to the list of annoyances — and expenses — associated with buying a foreclosure in the Twin Cities.
So, word the last week or so is that at least some banks in town selling REO (“Real estate owned”) properties — also known as foreclosures — are now including language in their booby-trapped, er . . . “customized” Purchase Agreements making Buyers responsible for Seller transfer taxes due at closing.
Depending on the value of the property and the city and county where it’s located, such taxes can range anywhere from $300 to $3,000 (or more).
Long (& Growing) List of Hurdles
Of course, that’s hardly the only hurdle unique to buying a foreclosure.
As I counsel would-be Buyers, the list (already) includes these five issues:
One. Poor/slow communication generally.
Sometimes that’s due to the listing agent, who is simultaneously selling dozens (or hundreds) of foreclosures; more often, it’s the bank’s fault.ã€€
Two. Property condition (and difficulty determining condition, due to winterization).
Believe it or not, one of the first issues to resolve in a foreclosure deal is de-winterizing the property.
Specifically, who pays to de-winterize it; who pays to re-winterize it — and who handles all the logistics (making the appointment(s), meeting the contractor, etc.).
Why does any of that matter?
Fixing a place with leaky (or no) plumbing, heat, etc. could easily cost another $10k – $20k.
Three. Bank unwillingness to perform/provide required documentation (e.g., required municipal inspections).
Four. Unclear/contradictory/non-applicable contract language.
In my experience, the first thing most banks do is toss out the standard Minnesota real estate Purchase Agreement and Addenda — with their defined terms and settled interpretation — and substitute their own.
So, even though Chinese drywall is a problem in places like Florida and Southern California, not Minnesota, not a few banks require Minnesota REO Buyers to sign related disclaimers. See, “Chinese Drywall in Minnesota?”
Call it “one size fits all” real estate contracts.
Another bank favorite: tweaking the language in the standard Inspection Contingency, limiting (or barring) any Buyer recourse if the inspection turns up problems, including cancelling the deal.
Of course, that’s the whole point of performing an inspection.
Five. Potential exposure to liens, other encumbrances that may not necessarily be caught by the Bank’s closer and title company.
Frequently, a condition of REO deals is that Buyers use the bank’s representatives to perform these services, not their own.
Guess how motivated they are to find everything?
Can you say, “conflict of interest?”
Offsetting(?) Advantage: Price
Knowing all the above, why would anyone in their right mind want to buy a foreclosure?
One reason, and one reason only: at least occasionally, the price is so discounted (cheap) that the risks and associated costs are worth it.
Put it this way: if you can buy (what once was) a $200k house for $120k, you may still come out ahead even after absorbing/correcting all the issues, fees, etc. that come with.
Realtor Selling Bonus. Not.
So, for helping their clients navigate all these additional hurdles, Buyers’ agents can count on a fat commission, right?
Not only are most foreclosures sold for below-average prices (that’s their appeal!), the pay-out commission offered to the Buyer’s agent is frequently below average, too.
As Cal Tech says about its football team: ‘we may be small . . . but we’re slow.”