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Buyers beware of REO contracts and preferred settlement companies.

By Mark Organek

Services for Real Estate Pros with And the United States of America AZ SA543893000

March 31, 2008 07:05 AM

microscope

With the banking industry becoming more frequently involved as part of the seller's side of a transaction, it has become necessary to go over the REO department or Loss-mitigation department's required paperwork with a fine toothed comb.

Key item to watch out for? The reluctance of the bank or institution to pay for owner's policy title insurance or for the seller's share of settlement charges.

In this market, many buyers are first time home buyers. These FTHB contracts are usually sent in requesting a concession from the seller to the buyer for closing costs.

To further complicate the issue, the institutions are usually requesting that the closing take place at their "preferred" settlement company. Funny, isn't it? Isn't the buyer given the freedom to choose the settlement company per federal guidelines?

We understand why the financial institutions will have a preferred settlement company. But, whenever there is a company "preferred" by one party in a transaction, will that same "preferred" company show loyalty to the transaction's parties equally or will there be a risk that favoritism will be shown to the party providing the pipeline of steady business during a slowdown in the market?

Although it has become a common event for the selling side to influence the choice of the settlement company, be on the lookout for any potential pitfall you or your buyer may fall victim to.

When a buyer is finally able to get an approval from the bank, before accepting, request a preliminary settlement statement from the settlement company. They usually have templates already established for each lender that they work with and can spit one out very quickly. Ours usually get back to us the same day.

If you don't, you'll find out when it is too late. Usually when the settlement agent is drawing up the pre-audit. By then, the contract terms have already been agreed to. Every time we have experienced this, the buyer's agent has taken responsibility for it and was willing to pony up the charge. An owner's policy out here along with half the settlement charge runs about $1,200.00. Quite a bit to give up considering the call to the settlement company would take just minutes.

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Christopher Watters

Watters International Realty - Austin, TX

Austin Realtor (512-829-8000)

REO can be really tricky. This is a great blog to give consumers and realtors a heads up on how cautious we have to be.

Mar 31, 2008 07:10 AM

Mark Organek

And the United States of America - Mesa, AZ

It's not a game, it's your life.

Christopher - Thank you for confirming the theme of this post. Consumers do have to be careful and Realtors may end up the scapegoat on a deal gone sour over interpretation of contracts and addenda.

Mar 31, 2008 07:15 AM

Chris and Berna Sloan

Group 1 Real Estate - Tooele, UT

Tooele UT

Christopher... Thanks for the heads up. Most of the agents and almost all of the clients have not dealt with the bank as the seller, or the decision maker.

There are no standards or playbook either. We as agents must be vigilant.

I have had to pony up some fees that I felt I should have been able to catch prior to closing. No more.

Thanks again

Mar 31, 2008 07:23 AM

Stanton Homes

Stanton Homes - New Home Builder - Raleigh, NC

Design/Build Custom Home Builder in North Carolina

Mark - great call on requesting the settlement statement up front. Gives everyone a chance to ask questions.

Mar 31, 2008 07:29 AM

R. B. "Bob" Mitchell - Loan Officer Raleigh/Durham

Bank of England (NMLS#418481) - Raleigh, NC

Bob Mitchell (NMLS#1046286)

It comes down to "he/she who cares least, always winning". I'm working one right now and the contract addendum was so one sided I almost laughed, but if we wanted the house, we had to dance to their tune.

Bob Mitchell

ValueList Real Estate Services, Inc.

Mar 31, 2008 07:31 AM

Mark Organek

And the United States of America - Mesa, AZ

It's not a game, it's your life.

Chris - It's always tough to pony up those fees, especially when the buyer feels that you should have caught it. After the buyer "accepts" the terms, it is tough to get the seller to forgive oversight. I hope this is one more thing that can keep your money in your pocket where it belongs.

Penny - They really do send it over pretty quickly. If they make an error, as the settlement company, their "neutral third-party" status can then come into question. Just make sure to do this before the buyer accepts the bank's documents.

Mar 31, 2008 07:32 AM

Mark Organek

And the United States of America - Mesa, AZ

It's not a game, it's your life.

Bob - Isn't it funny how it seems almost as if they are creating situations to NOT sell a home? You're right, if you want the house you may have to do some tongue biting.

Mar 31, 2008 07:35 AM

Frank D'Angelo

EXIT REALTY NEXUS Minneapolis & St. Paul MN - Coon Rapids, MN

Helping people is my business in Real Estate

Well done Mark,

Choosing your own title company may cost the buyer a few extra dollars, however the insurance on the title becomes worth it tenfold.

I always ask the seller/bank to pay for a one year home warranty as well. They have never said no. Here's the cool thing, I ensure my buyers a one year home warranty up front.

Have a great year.

Mar 31, 2008 09:57 PM

Mark Organek

And the United States of America - Mesa, AZ

It's not a game, it's your life.

Frank, that is awesome that you're looking out for your clients that way. It seems that the agents on AR are of that style. Good luck in your area!

Apr 01, 2008 07:19 AM

Anonymous

matt

I'm a settlement attorney in Virginia, and appreciate the words of warning put forth by this Arizona Realtor. Our county has a disproportionate number of bank-owned property. Daily, I educate real estate agents on the danger of going with the seller-preferred settlement agent. If you read the "title" paragraph in the bank addenda, you will see that banks are only required to give "insurable" title to the Purchaser. Purchasers need to know when they are taking title subject to "insured" title defects. Why? They will be selling that property one day, and many standard form contracts require both insurable AND marketable title. The danger, among many, in using a seller-affiliated title company, is that I don't believe Purchasers are told what title they have. Granted, in some cases, it saves the Purchaser a few hundred dollars in title insurance costs (I say, in some cases because Banks are usually willing to pay closing costs, so in many cases, there is NO financial benefit to using the seller's title company), but absent that, it seems to me that it is worth going with an unattached attorney or title agent to review title and communicate what the Purchaser is buying. Yes, I have a business motive here, and I don't hide that, but the home-buyer is clearly best served by choosing the closing agent you've trusted with all of your past transactions. A final thought, keep in mind that the Banks make very little money, if any, on the title side. Usually the listing agent is pushed to use the local affiliate, so stand your ground. Know that RESPA says that the seller cannot require who issues the title insurance on a residential property transaction.

Best Wishes,

Matt

Aug 11, 2008 04:03 PM

#10

Mark Organek

And the United States of America - Mesa, AZ

It's not a game, it's your life.

Matt - You've better clarified why buyers should be aware of the shenanigans that the banks are making. Most everyone here has an ulterior motive for their business and your contributions will be welcome. Click here to become part of this community of those that help others and receive referrals and outside business by providing valuable information. The ulterior motive is part of the reason why we contribute for free to the public.

Aug 11, 2008 04:31 PM

Rob Dalton

Waikoloa Vacation Rentals - Waikoloa, HI

Big Island Vacation Rental Guru

Just out of curiousity how often have you seen the bank pay for the cleaning and the termite inspections? In my experience they are not likely to cover much at all.

Apr 25, 2010 06:30 PM