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Do You Know What the Bank Addendum REALLY Says?

If your offer on a bank-owned or short-sale property is "accepted", you will receive the bank's addendum to sign. Many buyers (and their agents) just skim through it, sign on the dotted line and send it back to the listing agent. But they don't truly understand what the addendum says nor how it could affect them.

Some say, "It's just an addendum. The original sales contract has been accepted and those terms are what count."

Wrong.

The bank's addendum always has language in it that says something similar to, "This addendum supersedes the terms of the contract of sale and all other addendum." or "In the event any provision of this addendum conflicts in whole or in part with the terms of the contract of sale, the provisions of this addendum shall control."

In layman's terms...the bank's addendum trumps any and all terms of your original offer which you thought the bank "accepted" and "agreed to". 

Some of the most commons things in the sales contract that are trumped by the bank's addendum are

• contingency time frames
• title/deed
• inspections (or lack thereof)
• termite inspection/remediation
• closing cost assistance/concessions
• transfer taxes/tax stamps
• HOA assessments
• real estate broker commissions

All of these could potentially have a big financial and legal impact on a buyer. Every buyer should fully understand what the terms of the bank's addendum really say and mean.

Let's look at an example...

Let's say you put "10 days" for the financing contingency, but the bank addendum says "buyer's time frame for financing contingency is 5 days". You don't notice and your agent doesn't notice. You, your agent and, more importantly, your lender doesn't notice. Your lender thinks he has 10 days to get final approval on your loan and is working on your loan accordingly.

On day 7, your lender comes back and says, "Sorry, the underwriter found some things they weren't happy with and wouldn't approve you for a loan." You immediately call your buyer's agent and say, "I couldn't get final approval so get me out of the contract using the financing contingency."

Your agent calls the listing agent to get you out of the contract only to find out that you are S.O.L. because the financing contingency is only 5 days per the bank addendum (which you signed 7 days ago). You've gone from getting out of the contract to forfeiting your earnest money deposit.

(This actually happened to a buyer who had a ratified contract on one of my friend's/fellow Realtor's listings)

Btw...If you're wondering whether you can change or counter and of the terms of the bank addendum, the answer is "no". If you want to buy the property, you have to agree to the terms as they are.

If you don't like the terms, feel free to back-out and look for another property. But all bank-owned and short-sale properties have bank addendums that all pretty much say the same thing using different fancy words.

So next time you go to buy a bank-owned or short-sale property, make sure you have a buyer's agent that knows what they're doing and that you read the bank addendum carefully and in its entirety. If you don't, you could get burned badly.

Do You Get a Home Inspection With a Foreclosure/Bank-Owned or Short-Sale Property?

You may be wondering if you're able to do a home inspection on a foreclosure/bank-owned or short-sale property prior to writing an offer or afterwards. Well, the answer is "no" and "maybe". The "no" is the easy part - the "maybe" is where it gets tricky.

The easy part...You definitely do not get to do a home inspection prior to submitting an offer. That's the case with most all residential real estate sales - foreclosures/bank-owned properties, short-sales, traditional resales and new construction.

The tricky part...you may or may not be allowed to do an inspection of the property after verbal or written ratification. Let me explain...

Some banks will let you do an inspection of the property within a certain time frame from the date of ratification, either written or verbal ratification. If that's the case, you can have the property inspected and if there are "material deficiencies" (e.g. cracked foundation, water damage, holes in the roof), you can give notice to the bank and walk-away from the contract. You must provide the inspection report noting the "material deficiences" along with the notice that you're walking away within the specified time frame.

But...

Some banks will not allow you to conduct an inspection nor have a clause that lets you pull out of the deal if you find something "wrong with the property" after the contract has been ratified. And no...you can't just ask your agent to "open the door for you" and let you waltz around the house doing an inspection anyway.

The contract will most likely state that the bank will give you "reasonable access to the property" and accessing the property for an inspection that is not agreed upon in the contract is not "reasonable". I'm not a lawyer, but I wouldn't be shocked to find out that the bank may view something like that as trespassing and possibly a breach of contract. (Thank goodness that I've never had to find that out for real)

How do you know if an inspection is allowed and whether there's a clause that protects you and leaves you a way out?

Have your agent find out for you or, if you're in Dual Agency, ask the listing agent (I do NOT recommend Dual Agency, but that's for another post). There are other ways to protect yourself such as putting certain language in your offer, but I won't get into details about that here on this post.

And make sure you find stuff like this out before you write an offer so you're not wasting your time nor getting stuck buying a property that ends up being a lot more hassle and work than you originally thought.

10 Things You Should Know Before Writing an Offer on a Foreclosure/Bank-Owned Property

Back in October, I wrote a post entitled, "Read This Before Writing an Offer on a Bank-Owned Property", which cited several things from a post over at Agent Genius. I'm writing a similar post today because some things have changed while others need to be reinforced. So here goes...

Foreclosures/bank-owned properties are quite different from traditional resales. There are many things to consider and understand before writing an offer on a foreclosure/bank-owned property. For starters, here are the top 10 things you should know before writing an offer on a foreclosure/bank-owned property (click on links for greater explanation):

1. Properties are sold "AS IS" - All properties are sold "AS IS" in their present condition. If you are using FHA financing, this may present a problem.
2. Multiple offers - If the bank receives multiple offers, buyers may be requested to submit their "highest, best and final offer" by a specific date and time. All offers received by that date will be presented at the same time.
3. Proof of Financing/Funds - All offers must have a lender letter with loan and approval amount indicated in the letter or proof of funds otherwise the bank will not respond.
4. Countrywide/GMAC-owned properties - If the property is being sold by Countrywide, you must also provide a lender letter from Countrywide prior to or along with your offer otherwise Countrywide will not review your offer. (The same goes for some properties being sold by GMAC - ask your agent to check the MRIS/MLS remarks section of the listing)
5. Delay of settlement - If the closing is delayed due to the buyer's inability to obtain financing after the financing contingency has been removed or if the buyer's lender delays settlement by not having the loan docs or funds ready by the settlement date, the bank will typically charge the buyer $100.00 per day.
6. Bank addendums - All bank-owned properties have their own set of addendums. They supercede the Regional Sales Contract or other such contracts. Sometimes, these addendums must be signed and submitted at the same time as the offer. Other times, the addendums will be provided to the buyer after their offer is accepted. Until all the addendums have been signed and delivered, the contract is typically not considered "ratified" and the bank may sometimes continue to market the property for sale.
7. Response time - Response time on foreclosures/bank-owned properties can vary from 24 hours to several days or a week. In the case of Freddie Mac or Fannie Mae owned properties, a verbal response may take several days while a written response may take several weeks.
8. "Sale of Home" contingency - Banks will not accept "Sale of Home" contingent contracts - no exceptions.
9. Title company - Banks will want to close at a title company of their choice and do not like to do "split settlements". The bank addendums that you must sign to purchase the property will state that you agree to using the title company the seller has chosen.
10. Inspection/utilities - If the property has been winterized and if the buyer is allowed to do an inspection, the buyer must ask for permission from the seller to dewinterize the property just prior to the inspection and rewinterized immediately after inspection. Not every bank allows an inspection so check on that before submitting an offer.

There are other nuances and things to be aware of, but these ten are some of the most important. If you have any questions, feel free to drop me a line - danilo.bogdanovic (at) gmail (dot) com or 703.582.6900 (cell).

Related Posts

Glossary of Real Estate Terms

What Does "As Is" Mean?

Foreclosure and short-sale properties are all sold "AS IS". But what does "AS IS" really mean?

"AS IS" means that what you see is what you get. Ninety-nine percent of the time, the seller (bank) will not make any repairs to the property (the one percent is FHA financing-post on that coming soon). It also means that the extent of the seller's obligation with respect to title will be to provide insurable title to the purchaser.

Here's an excerpt from an "AS IS" clause from Freddie Mac:

"Purchaser understands that the seller obtained the property by foreclosure, deed in lieu or foreclosure, forfeiture or similar process and consequently, seller has little or no direct knowledge regarding the condition of the property. Purchaser accepts the Property in  "AS IS" condition at the date of the Contract of Sale, including, without limitation, any defects or environmental conditions affecting the Property, known or unknown.

Purchaser acknowledges that neither the seller nor its agents have made any warranties, implied or expressed, relating to the condition of the Property."

Here's an excerpt from an "AS IS" clause from IndyMac Bank:

"Buyer acknowledges and understands that the Property is being purchased and sold as-is, where-is and with all faults. Buyer further acknolwedges and understands that the Property was acquired by Seller through a foreclosure or other similar action and therefore, Seller is not an owner-occupant and Seller's information concerning the Property and its condition is extremely limited. Accordingly, Buyer acknowledges and understands that, except as otherwise disclosed in writing to Buyer, Seller is unaware of any latent defects in the Property or any appurtenant systems including, without limitation, plumbing, heating, air conditioning and electrical systems, fixtures, appliances, roof, sewers, septic, soil conditions, foundation, structural integrity, environmental condition, pool or related equipment. Seller makes no representations or warranties as to (i) the condition of the Property or any of the Property's systems or improvements, or (ii) the serviceability or fitness for a particular use of the Property or any component of the Property."

As you can see, "AS IS" clauses are also a huge C.Y.A. for the banks. As a buyer, you must understand that the property is sold "AS IS" and that you'll need cash and/or sweat equity of your own to fix it up.

For those of you that have the cash and/or sweat equity to perform the repairs, there are some great bank-owned deals out there, especially from Fannie Mae and Freddie Mac. For those who don't have the cash or sweat equity to invest in a foreclosure property, don't worry...there are great deals on foreclosures that require very little work, as well as on traditional resales.

NOTE: This is not meant as legal advice nor should it be taken as such. For guidance on any and all "AS IS" clauses and contracts in general, contact an attorney.

IndyMac, Other Banks Say, "Oh By The Way... We Won't Pay For Points Afterall"

For those of you who are planning on writing an offer on a bank-owned/foreclosure property, know this...certain banks such as IndyMac will not pay for any of your discount or "buy-down" points. IndyMac and certain other banks will send you an "addendum" after the contract and bank addendums have been signed (aka ratified) with several provisions in it, one of them being:

"Seller's closing costs not to pay for discount points and/or buy down points."

What does this mean to you as a buyer? It means that you'd better make sure you plan on paying any discount or "buy down" points out of your own pocket if you're trying to buy an IndyMac owned foreclosure property.

What if the bank agreed in writing to pay ______ amount in seller closing cost assistance and part of your closing costs is a buy-down point(s)? Even if these points are part of your closing costs which the bank agreed to pay for as part of the contract and bank addendum, the bank will refuse to pay for them.

Is it starting to smell fishy in here? Keep on reading, the smell gets stronger.

The person authorized to initial and sign the contract and bank addendums on behalf of the bank tends to forget to initial the contract in 2 or 3 places almost every time.

This brings up several questions:

1. If the offer was already ratified, is the "addendum" really just an "ammendment"?
2. If the offer was already ratified, does the buyer have to sign and agree to the "addendum"?
3. If the buyer refuses to sign the "addendum", does the bank have the right to not move forward with selling you the property?
4. Is the person authorized to initial and sign for the bank accidentally or purposefully leaving a few initials missing so one could argue that the contract wasn't technically "ratified"?
5. Is the bank using the missing initials and "not technically ratified" as a way to coerce a buyer into signing the "will not pay for discount and/or buy down points addendum" and/or leaving the bank a way out of the contract?
6. And lastly, is what they're doing right or wrong? If wrong, what can be done to stop it from continuing to happen.

I am not a lawyer and therefore will not get into legal-ease. This is a matter that should be referred to a lawyer for clarification and guidance.

What I will say is that I personally believe and it's my personal opinion that it doesn't seem right for a seller to accept and agree in writing to an offer that includes seller closing cost assistance and then come back later and say, "but I won't pay any discount or buy down points as part of the closing cost assistance I originally agreed to in writing".

Wait, there's more. Hold your nose real tight and breathe through your mouth cause the smell's gonna get worse...

Some of these banks don't bother to tell the listing agents that are listing their properties that this policy or the "extra addendum" even exist.

Despite this policy by these certain banks, is there a way to still get up to 1 point paid for by the bank? Yes, there is. Knowing this loophole is key to negotiating with banks.

Moral of the story? Be careful out there and make sure your buyer's agent knows what they're doing when it comes to foreclosures/bank-owned properties and dealing with the various banks out there.

Read This Before Writing an Offer on a Bank-Owned Property

If you're considering writing an offer on a foreclosure/bank-owned property, you need to read the post entitled "20 Things You Should Know When Writing An Offer on a R.E.O. Property" over at Agent Genius. Though it's for agents, most of the items pertain to buyers.

Here's an excerpt:

#1 Verbal offers are rarely accepted, considered, or responded to.

#2. Seller is an institution or government agency and does not respond to offers on weekends or holidays. Offers presented during these times will be presented the following business day!

#3. Be aware, the possibility of multiple offers exists, all offers will be presented to seller. Please read items 4-8 carefully.

#4. Seller is looking for HIGHEST AND BEST OFFER, this means that the highest offer may not be accepted. The institution definitely weighs all of the risks associated with offers. Contingencies and sales terms are considered to determine with whom they will enter into contract.

#5. Response times of 5 to 7 business days or longer are not unusual. Your offer will sometimes require the signatures of multiple parties. Be advised that all efforts are being made to give the buyer a timely response. The listing agent has no control over this time frame! The listing agent has the same desire as you, to see a successful closing!

#6. Due to the nature of R.E.O’s, once there is an acceptance of your offer, the usual turn around time for an executed (fully signed) contract is 7 to 10 business days.

#7. Because of items 2 - 6, once an offer has been sent to the seller for FINAL (fully signed) approval, all offers after that are considered back up offers.

#8. Seller may respond with a “reject offer” with no counter.

The remaining 12 items are also important so make sure you check out the full post. If you have any questions on any of the items or need clarification, don't hesitate to contact me - danilo.bogdanovic@gmail.com or 703.582.6900.

Trying To Avoid Going Into Foreclosure?

If you're trying to avoid going into foreclosure, you should check out some of the possible options available to you. One is Hope for Homeowners and the other is Hope Now.

Hope for Homeowners offers assistance to those who bought their home prior to 2008 and have a monthly payment that is over 31% of their income. It allows for banks to write the mortgage down to 90% of the home's current value. To learn more, check out the Hope for Homeowners FAQ page on HUD's web site and the Hope for Homeowners Fact Sheet.

Hope Now is a program that is offered by select lenders and mortgages providers that helps homeowners renegotiate their mortgages, and or defer or reschedule monthly loan payments. For more information, check Hope Now's web site. To contact Hope Now, call (888) 995-HOPE (4673).

Another option is to try and negotiate a short-sale. Though they say that short-sales are not as bad on your credit as a foreclosure, there are a lot of strings attached to short-sales and the chance of them being approved is pretty slim.

In my opinion, trying one of the first two options first as well as speaking with a tax professional and a financial planner for guidance would be a good place to start.

Related Articles

"Guide To Avoiding Foreclosure" - HUD

"Home Seller Needs Serious Help To Avoid Foreclosure - Short-Sale or Deed in Lieu" - Trulia Voices

"How much foreclosure relief will homeowners get from the bailout plan?" - Peter Y. Hong, LA Times

Maximize Your Profits By Catering To The Local Buyer Demographic

When you buy a foreclosure or short-sale to "flip", you are doing so in order to make the most amount of profit. Therefore, you have to think as a real estate investor/business person. What do we mean by that? Rather than making changes/renovations to the property that you like, you have to make changes/renovations that the local buyer demographic will most likely want.

Remember, you are "flipping" this house to sell it for a profit and that your target consumer is the local home buyer in that area.

If prospective buyers see your house on-line or in person do not like what they see because it's not what a typical buyer in that area wants, they will feel that the property is worth less than comparable properties. They will most likely offer you less money than comparable properties or they may just buy another similar property.

Either way, you lose money.

For example, on a recent episode of "Flip This House", the person who bought the foreclosure and "flipped" it made changes and renovations that they thought were "cool" and that they liked.

Here's what they did:

1. They painted the family room and kitchen bright lime green.
2. They painted the master bedroom an extremely bright blue.
3. They did a lot of "custom" work/details in the kitchen, which didn't fit into the local area/demographic whatsoever and was ugly to begin with.

If you saw what they had done, you probably would have said the same thing that the real estate agent did when they previewed the property:

"I'm a little worried that buyers will not like the color schemes and some of the custom work that has been done to the house."

Translation: "If you hadn't painted the house these colors and done all this custom work, which doesn't fit into what local buyers want, you'd be able to sell it faster and for more money".

These mistakes cost the investor several thousands of dollars yet, the mistakes could have been avoided at no extra cost.

Here's what the investor should have done:

1. Painted the entire house a neutral color as seen in most properties in the area.
2. Stuck with the type and color of granite, cabinets and flooring that is most common in properties of that type and in that price range.

By not doing this custom work, it would have actually cost the investor less money and increased their profit margin even more.

Don't make the same mistake this and other investors make and leave your emotions and personal taste at the door. Remember that this is just an investment and a product. Like any other product, you are selling it to a target consumer and you have to know what your target consumer wants. That is how you maximize your return and make the most amount of profit.

If You Have To Think About It, You Will Lose Out

If you are truly interested in purchasing a great foreclosure deal in Loudoun County (or anywhere for that matter), you have to be ready to jump at the opportunity. Immediately. If you have to think about it, you will lose out on every great deal out there. Guaranteed, you are not the only who thinks that the property is a phenomenal deal. Others who think so have already prepared themselves to jump at such an opportunity and have already submitted their offer while you are still thinking about it.

Would you have to think about it if someone was offering 3rd row, 50 yard line tickets to the Redskins/Cowboys game for $50 total including club and parking passes? If you were a true Redskin or Cowboy fan, you wouldn't even blink before saying yes. Everyone knows that those tickets are worth 10 times that and will be gone within minutes.  You have to act immediately or you will lose the opportunity to get them. The same goes for investment opportunities.

If you think we're exageratting, check this out:

• All of the properties we've posted here on Loudoun Foreclosures are sold/no longer available
• All of them sold within 1 week of being listed at that price
• Several had multiple offers (one had four offers on it)
• The majority of the offers were submitted within 24 hours of the property hitting the market.
• Some of the offers were submitted within as little as 6 hours

If you are truly interested in purchasing a foreclosure or short-sale, here's what you need:

• Clear and definitive knowledge of what you want. This includes what type of property, whether you wish to "flip" it or rent it out and what price point you are looking in.
• A recent lender letter or credit statement showing that you are qualified for a loan or have the cash to purchase the property. This should be in your hands prior to submitting an offer because it needs to be submitted at the same time as the offer.
• A significant amount of earnest money that is able to clear immediately.
• The ability to settle quickly. Most banks like to settle as quickly as possible, even in as little as 2 weeks. For example, if you are purchasing a Countrywide foreclosure and it's a cash deal, you have to be able to settle within 15 days of ratification. If it's a non-FHA loan, then it's within 30 days.

The reason why so few investors make money is that very few actually "get it". The successful investor is ready to pounce on the few truly great deals ou there the moment they become available. That leaves the not-so-savvy investors with the "so so" deals, which have a much smaller ROI and may even lose money. To increase your chances of being successful, you have to be at the same level, if not ahead of, the other savvy investors all around you.

Are you?