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FNMA REO Contracts Can Be Onerous

Word on the street is that Fannie Mae is including some pretty tough clauses in REO sales contracts that prevent the buyer from selling or mortgaging the property for more than a certain amount within 120 days of closing.

We have consistently encouraged clients to engage us or another law firm to represent them as a buyer when they are purchasing an REO (Real Estate Owned) or bank-owned property after the lender has foreclosed and taken the property. (see http://www.clickorlando.com/news/19440677/detail.html).
 
The contracts in such deals are often written to be very favorable to the seller, and usually do not follow the normal conventions of the area where the property is located. For instance, we have seen and drafted many REO contracts where the seller pays nothing at closing except the premium for the owner’s title insurance policy and REALTOR commission. This means that the new buyer could be on the hook for back taxes, code enforcement violations, association dues, and other unrecorded liens. And the contracts usually permit the REO bank seller to terminate the contract if a better back-up offer comes along. For this reason, it’s best to have such contracts reviewed by an attorney before signing them rather than afterward.
 
Recently we have learned of another new wrinkle being included in such contracts when Fannie Mae is involved. The language may vary, but is similar to the following:
 
Grantee/Buyer/Purchaser herein shall be prohibited from conveying the Property to a bona fide purchaser for value ofr a sales price of greater than ($____________ = 120% of Sales Price) for a period of one hundred eighty (180) days from the date of Closing. Grantee/Buyer/Purchaser shall be prohibited also from encumbering the Property with a security interest in an amount greater than ($______________ = 12% of Sales Price) for a period of one hundred eighty (180) days from the date of the deed conveying the Property. These restrictions shall run with the land and are not personal to the Grantee/Buyer/Purchaser.
 
While we have only heard of Fannie Mae including such provisions in their contracts for sale and the subsequent deeds (as a restriction running with the land), it has been our experience that many REO companies follow Fannie’s lead. Therefore, if an investor’s intent in buying the REO is to “flip” it or refinance it for cash-out equity soon after closing, care should be taken to ensure such provisions are not included in the REO seller’s contract addenda. Any such provision would be a cloud upon the purchaser’s title until it expires by its own terms, preventing the resale or refinance of the property during that time.

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