Failure to Perform - Defaulting on an REO

[Bill Mitchell]

Curious here,

I know most in my market have written off the MLS at this point, but I would like to start looking at some houses to buy here in the DFW market.

• Often must opt out of an option period entirely
• In the state of Texas REOs are not required to provide a sellers disclosure notice. Providing this in a typical transaction provides the buyer 7 days to back out of the contract for any reason after receiving it.

With that being said, to make a competitive offer, you basically have to leave yourself no outs on the contract. That worries me. Even though I would intend to close and take title to these properties myself, I dont want to get in situation where something comes up and I wont be able to perform. If you fail to perform on an REO, is the bank going to come after you for specific performance?

[Buddy LaRue]

Originally posted by @Bill Mitchell:

Curious here,

I know most in my market have written off the MLS at this point, but I would like to start looking at some houses to buy here in the DFW market.

• Often must opt out of an option period entirely
• In the state of Texas REOs are not required to provide a sellers disclosure notice. Providing this in a typical transaction provides the buyer 7 days to back out of the contract for any reason after receiving it.

With that being said, to make a competitive offer, you basically have to leave yourself no outs on the contract. That worries me. Even though I would intend to close and take title to these properties myself, I dont want to get in situation where something comes up and I wont be able to perform.

If you fail to perform on an REO, is the bank going to come after you for specific performance?

Hi Bill,

I'm licensed in Texas, California and Florida and was working the Texas market until my move to Florida in late 2012, and was working with Lifestyles Unlimited Real Estate Investors Group in Houston.

First of all, never completely write off any source of potential properties. You may not find deals everywhere in the MLS, but they are there. You just have to dig for them; or better yet, have someone else dig for them for you.

Here's some information that may help you if you plan on looking at REOs (foreclosed properties).

First of all, I have never seen, in any of the states I am licensed to work in, any REOs where the bank gave anyone a disclosure of any sort beyond the federally required Lead Based Paint Disclosure for properties built prior to 1978. The banks obtained the property through foreclosure and therefor are exempt from this disclosure (HUD homes will give you some information, but it's not a full disclosure of condition). HOWEVER, most foreclosed properties give you a 7 to 10 day "inspection period". This should not be confused with Texas's "option period" for which a buyer typically pays a small amount (usually around $100) for the property to be taken off the market and the buyer can back out for any reason during the option period. During the inspection period you need to quickly do most of your due diligence, including the property inspection. Should you need to back out of the contract for any reason, you simply need to find an item on the inspection report that would NOT be readily apparent to the average buyer going through the home and looking at the property prior to making the offer. That's the clincher...make sure you choose an item that would not be readily apparent. This gives you your "out" and you can get your earnest money deposit back so long as you terminate the contract within the inspection period. (PM me if I need to clarify that more for you). Beyond that, your outs are: title issues that the seller is not willing to clear to give you "clear and marketable title", or because your lender will not lend on the property.

Should you back out of a contract for "no good reason" after the inspection period ends, your earnest money deposit would be forfeited to the seller. I've been licensed for over 15 years now and have yet to see a bank sue for specific performance, though it can happen. Protect yourself and use your inspection periods wisely. Do as much due diligence (including general inspection, search for open permits, search for code violations and code liens), and gather repair estimates on the property as early as possible in the inspection period, then use the "not readily apparent" items as your way out of a contract if the deal turns out to be no good.