REO Confusion. Please help!

[Johnny Debt]

Hello,

I made an offer on a REO with 20% down and the rest is being financed. I was told that no inspection would be possible after accepted offer. My loan officer qualified me for a renovation loan to fix whatever is not in HUD minimum property standards.

The loan officer told us to bring a home depot person (because they won't charge for their inspection) to see how much work needs to be done and she would qualify me for additional renovation funds for the home. She also told us not to get an inspection because we don't have an accepted offer, it would be wasting our money if our offer was not accepted. However the listing agency specifies that no inspection is possible after accepted offer. We only estimated the cost of repairing the house, however the house has no water/electricity/heating. We plan for the worse case scenario for fixes and qualify for renovation funding from bank.

The contract was sent to our lawyer. A friend of mine told me because we don't have an accurate figure for fixing the home, the appraisal might come up short. He said that if the appraisal comes up short after formal contract is signed we are going to lose our down payment unless we can come up with all cash to purchase the home.

Is there anyway to protect myself from losing my down payment if I go through with the contract? I thought contracts were contingent upon the buyer being able to obtain financing.
I also thought in a renovation loan the bank will appraise the house as is, and appraise it after the renovations are done.
Or is my friend completely wrong about this?

Any help would be greatly appreciated.

[Ralph S.]

Hi Johnny

Not a lawyer or anything, just my opinion, so take it fwiw.

“I made an offer on a REO with 20% down and the rest is being financed.â€

If the offer stated a financing contingency, it should state the terms, yada-yada-yada. As a REO purchase, you should have also had to include a proof of funds, such as a pre-approval from your lender and/or bank statements showing you have the down payment available. If the financing contingency of the offer is correctly written, then later, if the appraisal comes up short, you will likely have options to consider and you should have sufficient grounds to back out and recover your earnest money. You need to hear this from your lawyer. There are some (HUD) where this doesn’t apply.

“I was told that no inspection would be possible after accepted offer. “

REO, or any other property being sold “as-is†will normally not allow an “inspection contingency†where the buyer can back out and recover their earnest money if there are surprises on an inspection. This does not prohibit an inspection after the offer is accepted, it simply means the buyer cannot use that inspection to bail out and recover the earnest money deposited. Any inspection then, is simply for your information only.

“My loan officer qualified me for a renovation loan to fix whatever is not in HUD minimum property standards. The loan officer told us to bring a home depot person (because they won't charge for their inspection) to see how much work needs to be done and she would qualify me for additional renovation funds for the home. “

This should have been done prior to the offer being written. Know all the costs and get adequate financing approved prior to writing an offer on a REO. As you should already realize, “as-is†means just that, as it is, no fixes or re-negotiating price due to any defects later found in the property. Don’t offer to buy if you don’t know what it’s going to take. Remember, your "price" isn't the contract price, it's the cost of acquiring plus renovation. How can you make an offer without knowing all the costs?

She also told us not to get an inspection because we don't have an accepted offer, it would be wasting our money if our offer was not accepted. However the listing agency specifies that no inspection is possible after accepted offer. We only estimated the cost of repairing the house, however the house has no water/electricity/heating. We plan for the worse case scenario for fixes and qualify for renovation funding from bank."

Jeez-louise. Where do I start? Mind you, this is my opinion only, but, find a new loan officer. She’s clearly put her loan commission ahead of your interests. If you’re looking at a REO property with no water/electricity/heating and she’s saying don’t get an inspection, she must think you’re an all day sucker. Again, as-is means just that. Caveat emptor means buyer beware. Are you really considering such a major purchase without knowing what could be wrong? Paying for an inspection isn’t a waste of time or money if that $300 or so keeps you from buying an over priced financial nightmare.

“The contract was sent to our lawyer. “

Your lawyer, or the banks? Might be good advice to get one just for you, as opposed to “sharing†the banks lawyer.

“A friend of mine told me because we don't have an accurate figure for fixing the home, the appraisal might come up short. He said that if the appraisal comes up short after formal contract is signed we are going to lose our down payment unless we can come up with all cash to purchase the home. “

Depends upon how the offer is written. With a properly written financing contingency you will have options. See the financing contingency notes above. It’s always a risk today. Make sure the contingency protects you for this. Talk to your lawyer. Oh, did I suggest “your†lawyer?

“Is there anyway to protect myself from losing my down payment if I go through with the contract?â€

This doesn’t make sense. If you go through with the contract, your earnest money (not down payment) will become part of the down payment on the closing statement. If you back out, it will depend upon whether you have sufficient reason to, per the contract. If it is because of a contingency in the contract, you should get it back, if you back out simply because you got buyers remorse or cold feet, then no.

“I thought contracts were contingent upon the buyer being able to obtain financing.
I also thought in a renovation loan the bank will appraise the house as is, and appraise it after the renovations are done.â€

Pretty much correct. So, my question to you is, how will the appraiser know what it will need or cost to fix the place unless someone tells them. An appraiser is not a home inspector or contractor, and not particularly skilled in estimating repair costs, especially if the defect is hard to detect. My suggestion is to get that inspection, get a couple contractors to bid on repairs, get the financing approved, make the offer and when the appraiser shows up, make sure they get a copy of the inspection and bids. Seem like a reasonable, logical, safe approach, doesn’t it?

“Any help would be greatly appreciated. “

Hope this helps. Don’t take anyone else’s advice. Get your own lawyer. Listen to what everryone says, question, learn, understand, get a second opinion if you are unsure, and make up your own mind. I think you got bad advice on the inspection. Bad advice to make an offer without better knowing what is wrong with the property and cost to make repairs.

If the offer has actually been submitted to the seller, and you now want to get that inspection, talk to your lawyer or Realtor real quick. You should be able to rescind the offer without penalty (get your EMD back) up until the time the seller actually accepts. Again, don't know where you are, or what the law is where you are. Ummmm. See your lawyer.

Good Luck.