The Art of Writing REO Contracts - Part 2 - Who Is the Seller?
This is a series of articles designed to help real estate investors better understand the important aspects of a Purchase and Sale Agreement when buying REOs (bank-owned properties).
The question of who is the seller should seem obvious but it isn't always.
There are more than seven ways to re-sell a mortgage note and the banks found ways to make money on each one.
This practice of slicing and dicing the mortgage notes and consolidating them into pools for resale were part of the cause of the mortgage meltdown.
What is remaining is a confusing array of ownership problems for foreclosing lenders.
The lenders' attorneys doing the foreclosures don't seem to notice there can be massive title issues - their only concern is foreclosing as quickly as possible.
In some cases they have foreclosed on properties where they later discovered they had no ownership of the mortgage note - a legal requirement for foreclosure.
The courts have been so overwhelmed that many illegal foreclosures have gone un-noticed even after the REO (bank owned property) was resold to the public.
As an investor looking to buy an REO, the issue for you is to determine the seller.
A quick look in the public records may show the homeowner still on title, the bank, the mortgage processor, or MERS (the electronic mortgage processor) to mention a few possibilities.
We actually have seen pool numbers and various numerical references to the date and structure of the pool.
So the ownership can be confusing or incorrect in the public record.
The safest and easiest way to handle the issue of "who is the seller," is to use the following terminology, "Owner of Record".
This cuts through the many title issues and puts the onus of the signatory on the contract to be the legal representative that the bank has chosen.
The closing agent should require the signatory to produce proof of his status as authorized by the title holder or owner of record.
The original homeowner probably can be on the title if the bank hasn't completed the foreclosure, hasn't evicted the homeowner or made the title change in the public record, or is in the process of a short sale.
In a short sale, the homeowner negotiates to sell the property to a buyer at a discount to the mortgage amount so the lender doesn't have to take possession and list the property and hope for a sale.
Short sales generally cost the lender a 30% to 35% reduction in the mortgage principal.
However, an REO can have a 50% - 75% reduction in the final judgment amount.
The seller's addendum will stipulate who the owner is and a set of requirements that overrides all the contract clauses the investor wrote into his contract previously.
These changes are very important to read and understand because they are contract law and despite what the listing agent may say about an issue, get it in writing or you could be in for a lot of problems.
If you have any questions or feel uncertain about anything in the contract or addendum, contact a local real estate attorney for advice.
The question of who is the seller should seem obvious but it isn't always.
There are more than seven ways to re-sell a mortgage note and the banks found ways to make money on each one.
This practice of slicing and dicing the mortgage notes and consolidating them into pools for resale were part of the cause of the mortgage meltdown.
What is remaining is a confusing array of ownership problems for foreclosing lenders.
The lenders' attorneys doing the foreclosures don't seem to notice there can be massive title issues - their only concern is foreclosing as quickly as possible.
In some cases they have foreclosed on properties where they later discovered they had no ownership of the mortgage note - a legal requirement for foreclosure.
The courts have been so overwhelmed that many illegal foreclosures have gone un-noticed even after the REO (bank owned property) was resold to the public.
As an investor looking to buy an REO, the issue for you is to determine the seller.
A quick look in the public records may show the homeowner still on title, the bank, the mortgage processor, or MERS (the electronic mortgage processor) to mention a few possibilities.
We actually have seen pool numbers and various numerical references to the date and structure of the pool.
So the ownership can be confusing or incorrect in the public record.
The safest and easiest way to handle the issue of "who is the seller," is to use the following terminology, "Owner of Record".
This cuts through the many title issues and puts the onus of the signatory on the contract to be the legal representative that the bank has chosen.
The closing agent should require the signatory to produce proof of his status as authorized by the title holder or owner of record.
The original homeowner probably can be on the title if the bank hasn't completed the foreclosure, hasn't evicted the homeowner or made the title change in the public record, or is in the process of a short sale.
In a short sale, the homeowner negotiates to sell the property to a buyer at a discount to the mortgage amount so the lender doesn't have to take possession and list the property and hope for a sale.
Short sales generally cost the lender a 30% to 35% reduction in the mortgage principal.
However, an REO can have a 50% - 75% reduction in the final judgment amount.
The seller's addendum will stipulate who the owner is and a set of requirements that overrides all the contract clauses the investor wrote into his contract previously.
These changes are very important to read and understand because they are contract law and despite what the listing agent may say about an issue, get it in writing or you could be in for a lot of problems.
If you have any questions or feel uncertain about anything in the contract or addendum, contact a local real estate attorney for advice.
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