Weighing rockbottom prices against potential risk is always a delicate dance. Purchasers of Real Estate Owned (REO) properties are repeatedly told the deals are “as-is” and that the seller will provide only limited (if any) representations and warranties. REO sellers (typically the lender that foreclosed upon the property) posit that they cannot give extensive information or reps about the underlying real property due to their short length of ownership. Buyer Beware though, does not mean Buyer Be Foolish.
Accordingly, buyers should insist upon the following being included in the REO purchase agreements:
1. Reps and Warranties. Despite any misgivings from the REO seller, at a minimum, buyers should insist upon the following representations and warranties:
i. the seller owns all of the property, has the authority to sell the property, the sale and agreement are enforceable against the seller and will not conflict with other agreements for which the seller is a party;
ii. there is no litigation concerning the property and no written notice of any governmental action;
iii. the provided due diligence materials that have been created by the seller are true, complete and correct and that the seller has no knowledge of any inaccuracy in all other provided due diligence materials; and
iv. the list of contracts and leases delivered to the buyer are true, correct, and complete.
2. Moving Targets Cannot Be Analyzed. Even in an as-is deal, the seller should have ongoing covenants regarding its operation of the property through and until the closing (i.e., to continue to operate and repair the property in a manner consistent with Seller’s past practices). Otherwise, the buyer is chasing a constantly changing asset and may be forced to repeat some of its own due diligence.
3. Beware of Limited Due Diligence Information. REO sellers will often only provide a “due diligence packet” that may reflect a small fraction of the information the seller has about the property from its involvement as the lender or otherwise. This can be troublesome and frustrating to a buyer that needs to analyze the full universe of all possible issues that may exist with the property, when simple answers regarding issues such as tenant default histories might be sitting in one the lender’s files. Buyers should insist on being able to review any materials not otherwise protected by legal privilege or are proprietary to the lender.
Make YOUR next REO purchase on your terms; not the seller/lender’s. We assist in all phases of the acquisition of distressed and opportunistic assets to take advantage of today’s market, including due diligence, negotiation and documentation of purchase agreements, financing and development, leasing and operation. For more information please call (480) 889-8948, send an email to firstname.lastname@example.org or visit http://www.SteinLawPLC.com