Foreclosure Real Estate Purchase Contract – What to Expect

A foreclosed home is one in which the home owner was unable to pay his home loan so that the lender took over home ownership 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 he will write up your purchase offer with you on a standardized contract which was developed by the Arizona Association of Realtors. The contract allows the agent to customize the contract for your particular purchase and has many built in protections for both the buyer and the seller.

When you make an offer for a foreclosed property, you can expect to receive back from the seller (the bank currently owning the property) an addendum to the contract. These addendums are in essence a counter offer that the buyer must accept if he wants to purchase the property. In some cases the seller will negotiate with the buyer over these terms but most sellers expect the buyer to agree to their terms. We have seen a wide variety of addendums in the past year as we have worked with buyers. In all of them, many of the protections for the buyer in the standard contract are eliminated or modified. Here are some of the things we are seeing.

Inspection Period

In the standard contract, the inspection period lasts ten days from the date the contract has been signed by both parties. We have seen addendums that change that to be ten days from verbal acceptance of the contract and have even seen a five day inspection period that must be completed before the buyer signs and accepts the addendums.

Title/Escrow Company

The seller will typically require the buyer to utilize the escrow company of the seller’s choice. Usually using this company helps facilitate the timeliness of the transaction because the escrow company is familiar with the seller’s requirements.

AS/IS & Disclosures

When you purchase an owner occupied property, you will usually get a Seller’s Disclosure Statement. This will provide information about the property and a history of repairs done. When you buy a foreclosure property, the seller has not occupied the property and typically will not provide any disclosure statements. Additionally, the buyer is generally required to purchase the property in its current condition “as is” and the seller will not make any repairs. If something is missing such as a kitchen appliance or garage door openers the seller will not provide it. What you see is what you get. Read the addendum carefully to understand what the seller will be responsible for if the property is damaged during the escrow period. The escrow period spans the time from when the contract is agreed upon by both parties until the sale records (close of escrow).

Cost for Extension of Close of Escrow

Most of these addenda have a per diem charge if you need to extend the close of escrow beyond the date in the original contract. The most common reason buyers need to ask for an extension of the closing date is that the lender has not completed loan processing and delivered loan documents to title several days prior to closing to allow time for both the seller and the buyer to sign. We have seen costs ranging from $40 to $100 per day.

Loan Approval

The Arizona contract allows for a return of earnest money deposited by the buyer if after a good faith attempt to obtain a loan at prevailing market rates to purchase the property the buyer is unable to do so. Some addendums are limiting the buyer’s time to obtain loan approval to a set 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 forfeit his earnest money to the seller. This holds true even if the inability to obtain the loan had nothing to do with the buyer’s financial qualifications. We have seen loans turned down in the past few months for condo purchases because the community had too low a percentage of owner occupied units or the HOA was not financially solid or some cases for both of these reasons.

Tenants or Other Occupants

Most of these properties will be vacant; however, if you see evidence that someone is living in the property when you are viewing it and prior to writing an offer, you need to ask questions. Who is living in the property? If the property has been rented, what are the terms of the lease? We’ve seen addenda that indicate that the seller will not evict any occupants of the property and that it will be the responsibility or the buyer once he has purchased the property. You should also be aware that tenants have rights too. Be very cautious about writing an offer for a foreclosure property that is occupied.

What Does the Buyer Need to Do?

It is very important for the buyer to read the entire addendum provided by the seller prior to signing. If he has questions about the addendum he should ask his real estate agent for clarification. He should also verify that his real estate agent has read the entire addendum and made note of key dates.

What to Expect After a Foreclosure

The “Great Recession” may be the first great misnomer of the 21st century. What was so “great” about it? An estimated 6.7 million Americans lost their homes since 2006, and another 800,000 may still lose their homes by the time all delinquent mortgages are settled. Perhaps you are one of these millions who face losing your home to foreclosure. What happens, next?

Beyond Falling Behind

There comes a point in falling behind on your mortgage payments when you simply can’t catch up. You may choose to let the foreclosure process proceed and if you do, here are some points to be aware of:

• Foreclosure moves on a schedule that is driven by both lender procedures and state laws.

• Educate yourself on the foreclosure process. Accessing your state’s website and searching “foreclosure” is a good place to start.

• You will not automatically become homeless once foreclosure proceedings have begun. There will be a period of time (depending on state laws) before a notice of default is issued. Once notice is given, you may have an additional period of time in which to make things right. If that isn’t possible, there will be a number of days before the house is actually sold. These factors also influence how quickly you must vacate your former home:

o Filing for Chapter 7 bankruptcy can delay sale of your house by a given period of time. Check state laws and consult an attorney before deciding if this is the best choice for your circumstances.

o The type of foreclosure (as mandated by your state): a judicial foreclosure process typically takes longer than a non-judicial foreclosure).

o At foreclosure, your lender may own the house or it may be bought at auction. The new owner cannot intimidate or threaten you to leave the property and you cannot automatically be evicted. A notice to vacate must first be issued (most states allow between five and 30 days to vacate).

The Story Continues (for Awhile)

Walking away from a home is not the end of the story. These are some of the potential post-foreclosure ramifications to consider:

• You may still be required to pay a portion of your mortgage debt after foreclosure and there may be some tax responsibilities to address.

• The length of time before you can receive a Fannie Mae mortgage for purchase of your next home is now seven years.

• Your credit rating will most likely be severely reduced, making it difficult for you to finance anything from a car or obtaining housing.

• You may face employability issues, particularly if you work in the financing and banking industry.

Any of these ramifications can be overwhelming but they don’t have to remain so. Consult with an attorney knowledgeable in foreclosure and bankruptcy. Know your options, legal rights, and responsibilities before you make any decisions.

Time to Move Forward

Losing a home to foreclosure is a traumatic experience for most homeowners. It also is a starting point where you can step away from a prolonged and stressful ordeal and begin building a new life.

Prepare yourself to manage today’s financial needs and opportunities and start planning toward your next home purchase. Commit to these steps as you move forward:

• Your top priority is to find an affordable place to live.

• Create a workable budget and stick with it.

• Avoid adding to your debt load and pay it down, starting with the highest interest debts.

• Rebuild your credit rating.

• Make consistent, on-time payments to creditors.

Perhaps the most important challenge (or opportunity) of all is to address any financial concern before it becomes an issue.