By Beau R. Pichon, Esq.
Given the recent surge in foreclosures in Maryland and across the country, it is no surprise that bank-owned (also know as “Real Estate Owned” or “REO”) properties now represent a large portion of the current stock of real estate on the market. While buyers can sometimes get a better deal on an REO property than they might have gotten from a traditional seller, one of the tradeoffs will often be that it will take twice as long to get to settlement as it normally would. It is no accident that most REO contracts provide for substantial daily penalties should the buyer fail to close on time, but no penalties if the seller is unable to close on the agreed-upon date. If you are a Realtor® representing a buyer in the potential purchase of an REO property, it would be wise to ensure from the outset that your client is prepared for the delays that inevitably accompany these closings.
There are many reasons an REO settlement could be delayed, but the most common causes are title issues, problems with the foreclosure, and logistical issues after the foreclosure sale. While the foreclosure attorneys should have reviewed the title and corrected any outstanding issues prior to the foreclosure sale, this is not always the case. As with any settlement, many different kinds of issues might arise that could delay or even terminate the transaction. With REO transactions, however, there are certain problems that seem to come up more often than others. The most commonly encountered issues are discussed below:
Unreleased trusts: When someone purchases or refinances a home, typically any outstanding mortgages must be paid in full and the underlying liens must be released. Occasionally, one or more of those pre-existing liens is not properly released. If an unreleased trust is encountered in the title search for the REO transaction, the foreclosure attorneys will need to be contacted to find out what, if anything, they know about it. If they cannot help clear up the problem, the attorney conducting the REO settlement will need to start from scratch and track down a release, which can sometimes take a great deal of time, depending on the particular trust involved.
Homeowners’ association liens and unpaid dues: HOA dues are generally payable by the seller from the date of the foreclosure sale forward. As long as the HOA was given proper notice of the foreclosure sale, any existing HOA liens will usually be wiped out. Sometimes, however, the HOA will dispute this and will demand payment of any outstanding dues. If this occurs, it will take time to deal with the HOA, which often entails getting the foreclosure attorneys involved.
Issues with the foreclosure sale: Sometimes, the foreclosure sale itself can be flawed. Before the sale occurs, for instance, certain interested parties must be given notice and an opportunity to contest the foreclosure. On top of that, the normal notice period for interested parties is extended in the case of a federal tax lien. If notice was not given within the allotted time period, or not given at all, the sale could be invalidated and the foreclosure process might have to start over from the beginning.
Post-foreclosure sale issues: Even if there are no pre-existing title issues, and the foreclosure sale was conducted properly, there may still be delays due to the technical requirements of the foreclosure process upon completion of the sale. For example, in Maryland, a foreclosure sale must be ratified by the court before the bank can turn around and re-sell the property to a new buyer. That ratification process takes at least 30 days. Often, a bank will list a property for an REO sale before the foreclosure sale has been ratified (and sometimes before the foreclosure sale has even taken place). Another post-sale issue that can cause delay is the fact that foreclosure attorneys typically will not record the deed transferring ownership of the property to the bank upon ratification of the foreclosure sale. They will usually wait and have that deed recorded simultaneously with the deed from the REO settlement. This can cause problems in two ways: 1) It can take quite a bit of time and effort to get the original foreclosure deed from the attorneys, and 2) Some lenders will not allow their borrowers to buy an REO property until that first deed has been recorded.
As you can see, there are several reasons why an REO settlement might be delayed. This article describes only a few of the most common problems. While most of these problems are manageable, they take time to fix, and making sure up front that your client is aware of the inherent risks involved in REO transactions is often the best way to avoid unwanted surprises down the road.
For further information on this topic, or for help with other real estate matters, please feel free to contact any of our attorneys.