This summary is based on limited information at this time, but at least informative and offers caveats to property buyers of distressed properties. This post will be updated as I learn more about the contract stipulation and measures of protection for both the financial institutions and the consumer.
Normally, a contract will provide for seller to transfer property under a General Warranty (a General promise to help “defend” or stand behind a legitimate title transfer); make certain guarantees and disclosures of condition; provide for a period of time for Buyer to perform inspections and a period of time to negotiate any repairs; obtain copies of surveys (if applicable); and generally hold themselves out for possible lawsuit if they have committed any fraudulent act or made false claims that were proven to defraud the Buyer based on the conditions of the property.
If the property is a short sale or foreclosure being handled by the bank, Fannie Mae, or Freddie Mac, then the contract may have several different provisions such as:
(1) Due Diligence Period: During a period of time referred to as the “Due Diligence” period, the Buyer is allowed a specific number of days to perform an inspection and will normally receive the option of proceeding with the purchase, or terminating the contract on or before this Due Diligence period expires and if terminated, still get their earnest money back.
(2) Property Condition: Under a non-distressed purchase, chances are the property owner has performed an acceptable level of property maintenance, all systems are working as they should, and the Buyer would not need to make many major repairs or changes to the property and it’s in a “move in” condition. Distressed properties may not have received the maintenance or repair attention from either the former owners or the bank who acquired the property. Both functional repairs and cosmetic changes may be required, but the bank will not agree to perform any repairs or maintenance on the property. o are essentially told the property is old “as-is”, or in it’s current condition and no better.
(3) No warranties or representations of conditions:
(a) Physical: Basically, this is where the bank attempts to legally wash their hands of any liability or responsibility of defect or faulty systems or any conditions that were faulty and the Buyer assumes all responsibility to have the home inspected. Buyer Beware – the bank doesn’t care!
(b) Title: The bank will make NO claim that title is clean or clear or stand behind any form of General Warranty where they will stand behind you to defend the legitimacy of title – their response – That’s what owner’s title insurance is for – we still don’t care! (Note: This is the importance of the title search and title insurance – which will even help add protection to Buyer after closing in case of valid liens found after closing.
(c) No home warranty of any form (even from an independent home warranty provider – see my previous blog post on Home Warranties) will be allowed to be paid for before, during, or after closing by the bank or Buyer. (Note: The Buyer can purchase one on the side if they wish, but the purchase is not allowed on the new HUD-1 Settlement Statement.)
(4) Hold Harmless: In other word, you the Buyer won’t take any legal action or sue the bank or any of its representatives in the future for anything that happens after closing including property damage, liens from previous contractors or other entities.
(5) Toxic Sheetrock: In the mid 2000’s due to skyrocketing residential development and demand exceeding supply of US sheetrock, some sheetrock was imported from China and other areas of the world that had synthetic gypsum and causes health or other problems to HVAC systems. Normally banks want to eliminate any legal action you may take after discovering existence of faulty sheetrock.
(6) Various contingencies for Buyer and Seller including, but not limited to:
(a) Seller is unable to transfer clean title to Buyer;
(b) Hidden legitimate liens that would result in a loss to selling bank;
(c) mortgage insurance claim will not be paid;
(d) previous owner exercises right of redemption;
(e) outstanding hazard insurance claim;
(f) a third party exercises their right of first refusal;
(g) Buyer is former owner of the short-sale/foreclosed property.
(7) Personal property: Items normally movable including kitchen refrigerator, furniture, detached shelving units, standing light fixtures, etc,. are usually excluded from the contract.
(8) Form of Title transfer: Normally, the bank will use a Special Warranty Deed and may use a Quit Claim form to transfer limited title – “If they own it, they transfer title to Buyer at closing”. Since the bank is basically telling you they transfer any ownership they may have, but will not help you defend the legitimacy of the title after closing. Therefore, it is imperative that you obtain adequate “owner’s” title insurance protection at closing.
(9) Property sale contingent on sale of another property? NO! In fact, the bank will prefer cash sale over Buyer financing, maybe even at a lower price.
(10) Occupancy-repairs-changes to property prior to closing? – NEVER! Don’t even think about leaving any personal belongings in the home before closing.
(11) Closing date delay: If there is a delay in closing date caused solely by the Buyer but not lender or Seller, there is normally a penalty fee of $100/day of delay.
(12) Survey: The ole responsibility of the Buyer – on a normal exiting residential property on a lot than 5 acres, nobody requires a survey. The decision to obtain a survey is normally the responsibility of the Buyer – totally their choice.
(12) Back-up offer “gotch-ya”: Some bank contract addendums have a contingency that the property will continue to be marketed and if a better or another acceptable offer (i.e., one without any contingencies) is received and agreed to, then the bank may give the first Buyer a number of days to satisfy those contingencies or terminate the contract. A little underhanded or sneaky if you ask me, but that’s the bank’s rule – not mine.
References to information, products, and/or services are not a specific endorsement, but the user must perform their due diligence and investigate whether the information, product, or service is right for them. I welcome any or all comments that would help others.