Managing your Risks in the Purchase of REO (Bank-owned) Property

23 Apr

In today’s economic environment, the house selling and purchasing marketplace is far more stagnant than it was a year or more ago. In the Minneapolis-St. Paul metropolitan market, there are far fewer buyers than homes to purchase. Many buyers are looking for a deal, and many buyers looking for a deal look to foreclosed or bank-owned homes. This type of home is often referred to as a real estate owned or “REO” property.

Keep in mind that price is only one consideration in a real estate purchase transaction, and getting a good deal on the price of the home doesn’t mean you are getting a good deal overall. Having unreasonable terms pertaining to delivery of clear title, possession date, restrictive as-is provisions, and unreasonable restrictions on financing and inspection contingencies can cause enough concern to make a purchase at any price unattractive.

As banks have become owners of properties through foreclosure, they have had to take the role of sellers, which is not an appealing position for banks. They are not interested in being property managers, and they want homes off of their books quickly, with minimal risk. Minimal risk to the bank means they often take the “bully” role, making unreasonable demands, asking the buyer to take all of the risk, and creating many “take it or leave it” propositions in the negotiation process.


Be wary when purchasing a bank-owned home, and be sure to consult an attorney knowledgeable about such transactions to advise you about the pitfalls, review or draft the contract, and assist with negotiations to even the playing field. Although some real estate agents do a great deal of work with bank-owned properties, they cannot give you legal advice, and cannot advise you about the legal consequences or strategies that may be involved in each provision of a contract which the bank has carefully inserted for their own benefit.

In any sale, sellers and buyers each want to minimize their risks in the purchase agreement. Where banks are involved as sellers, this tension increases, as banks want to shift all of the risk of the sale to the buyer. If the buyer is getting the home at an exceptional price, it may be reasonable to expect that will come with some risk. However, a buyer has to be very careful about how much risk is appropriate. In many instances, banks require buyers to waive their rights to sue or bring an action against the bank for damages if the bank is misleading, fails to disclose material facts, is not forthcoming about the condition of the property, or otherwise breaches the purchase agreement.

Before you sign anything related to the purchase of a bank-owned property, consult with your attorney. Although many buyers like to avoid the expense of having an attorney involved, this should be considered as important and valuable as in inspection – without getting proper legal advice you may be going into the transaction completely unaware of the risks lurking within the contract. Although banks may state that many of their terms are “non-negotiable”, if no buyer is willing to purchase with those terms included, eventually they will be forced to negotiate.

Knowing your rights, your options, and how to look for and negotiate fair terms with the bank will help you avoid legal liability, and will help you find the right home, at the right value, with the right amount of risk management.

Author:
This blog entry is written by Brad Boyd, Shareholder at Thomsen & Nybeck, P.A. Brad’s practice focuses primarily in Real Estate, Real Estate Brokerage, Business and Corporate law, and Wind Energy Law.  Brad works regularly with real estate transactions, real estate brokerage and agent representation, and providing transactional advice, guidance, and representation related to risk management in a wide variety of real estate matters. For more information about Thomsen & Nybeck’s Real Estate practice, please visit http://www.tn-law.com/CM/Real-Estate/Real-Estate-Law.asp.

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