A foreclosed home is one in which the homeowner was unable to pay his home loan, so the lender took 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 for this article. When you work with a real estate agent, they will write your purchase offer with you in a standardized contract that was developed by the Arizona Association of Realtors. The contract allows the agent to customize the contract for your particular purchase and has many protections built in for both buyer and seller.
When you make an offer on a foreclosed property, you can expect to get a contract supplement back from the seller (the bank that currently owns the property). These additions are essentially a counter offer that the buyer must accept if they want to buy the property.
In some cases the seller will negotiate with the buyer on these terms, but most sellers expect the buyer to agree to their terms. We’ve seen a wide variety of additions over the past year as we’ve worked with buyers. In all, many of the protections for the buyer in the standard contract have been eliminated or modified. Here are some of the things we’re seeing.
In the standard contract, the inspection period lasts ten days from the date of signing the contract by both parties. We’ve seen addendums change that to ten days from verbal 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 addendums.
The seller will usually require the buyer to use the escrow company of the seller’s choice. Usually using this company helps ease transaction timelines because the escrow company is familiar with the seller’s requirements.
AS/IS & Disclosures
When you buy an owner-occupied property, you will usually receive a Seller’s Disclosure Statement. This will provide information about the property and a history of repairs made. When you buy a foreclosure property, the seller has not taken possession of the property and usually will not provide any disclosure statements. Additionally, the buyer is generally required to purchase the property in its current “as is” condition and the seller will not make any repairs.
If something is missing, such as a kitchen appliance or garage door opener, the seller will not 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 storage period. The escrow period includes the time from the moment the contract is agreed upon by both parties until the sale is registered (close of escrow).
The cost of extending the escrow closure
Most of these extensions have a per diem fee if you need to extend the storage lockout beyond the date on the original contract. The most common reason buyers need to request a closing date extension is that the lender has not completed loan processing and submitted the title loan documents several days prior to closing to allow both the seller and buyer time to sign. We have seen costs ranging from $40 to $100 per day.
The Arizona contract allows for the return of the buyer’s deposit 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 are limiting the buyer’s time to get loan approval to a certain 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 lose his big money to the seller. This is true even if the inability to get the loan had nothing to do with the buyer’s financial qualifications. We have seen loan denials in recent months for condo purchases because the community had a very low percentage of owner-occupied units or the HOA was not financially sound, or in some cases both.
Tenants or Other Occupants
Most of these properties will be freehold; however, if you see evidence of someone living in the property when you are viewing it and before writing an offer, you should ask questions. Who lives in the property? If the property is leased, what are the terms of the lease? We have seen addendums that state that the seller will not evict any occupants of the property and that it will be the responsibility of the buyer once they have purchased the property. You should also be aware that tenants have rights too. Be very careful about writing an offer on a foreclosure property that is occupied.
What should the buyer do?
It is very important that the buyer read the entire addendum provided by the seller before signing. If he has questions about the supplement, he should ask his real estate agent for clarification. He should also verify that his real estate agent has read the entire appendix and noted key dates.