REO CLOSINGS: WHAT ARE THEY AND HOW DO THEY DIFER FROM A TYPICAL REAL ESTATE TRANSACTION?
If you plan to purchase real estate via an REO Closing, you should know what to expect and the differences between an REO Closing and a “regular” buy-sell property transaction.
“REO” stands for “real estate owned.” This term describes a class of real property that is typically owned by a bank or government funded agency. Fannie Mae and Freddie Mac are two of the most well-known government funded entities (referred to as “GFEs”) and they act as an investor on many loans provided in the United States. As the investor behind a loan and under Illinois law, GFEs also own the mortgages that secure their investment loans.
Next, it is important to understand the difference between a “lender,” “investor,” and companies that are referred to as mortgage “servicers.” The lender is the bank that gives the original loan, but then typically sells that loan to a GFE or other investor. As a result, most loans are owned by GFEs or large banks that operate as investors. The servicer is a company that is paid to temporarily hold the mortgage that secures the loan.
When an individual does not pay back a loan used to purchase or re-finance a home, the mortgage that secures the loan can be foreclosed. The foreclosure action is brought by the servicer. A completed foreclosure results in a foreclosure sale where the property is sold, usually back to the investor.
The investor then proceeds to sell the home to an independent third party. This process is a REO Closing, and as a home buyer you may be that independent third party. There are some important differences between and REO Closing and what one may consider a “regular” transaction to buy or sell a house.
First, a typical Illinois closing uses the most recent version of the Illinois Multi-Board Residential Real Estate Contract (the “Illinois Contract”). This contract is designed to be generally fair to both the property’s buyer and seller.
At an REO Closing, you will likely be required to sign the investor’s contract. An investor contract is generally more favorable to the investor than the individual or entity purchasing the property. Although each investor’s contract is different, most have terms that protect the investor in three key areas: 1) the return of earnest money, 2) the level of title insurance provided, and 3) the condition of the purchased property.
First, with a “regular” closing pursuant to the Illinois Contract, the party that breached the contract is required to refund, or faces forfeiture, of the earnest money. An investor contract may not provide a buyer with an opportunity to obtain an earnest money refund if the REO Closing is not successfully completed.
Second, be aware of the level of title insurance that the investor/seller is providing. A typical Illinois Contract requires the seller to purchase an owner’s policy of title insurance for the buyer. But as with all insurance, some policies are better than others.
Many investor’s contracts require the investor/seller to purchase only “basic” title insurance for the buyer. This differs from an Illinois Contract which requires the seller to provide an “extended” title insurance policy.
The main difference between a basic and extended title insurance policy is that an extended policy insures over liens, easements, and encroachments that are not part of the public record. A basic policy does not. The cost to purchase a basic policy is cheaper than an extended policy, which is why the investor/seller may include this provision in an REO Closing contract.
Finally, it is likely that the investor’s contract will make no warranties or guarantees as to the condition of the property. The investor has not lived in the property prior to its sale. As a result, the investor is unlikely to provide any warranties as to the property’s condition.
If you are thinking about entering into an REO Closing contract, local attorney Andrew Szocka provides thorough and speedy real-estate assistance in the Chicagoland area. To schedule a free initial consultation, visit Andrew Szocka, P.C. online or call the office at (815) 455-8430.