Listing of Key Aspects of REO Sales Contracts - the Seller's Perspective
With more banks and CMBS loan servicers taking title to CRE (via foreclosure and deed in lieu of foreclosure), the amount of REO (or real estate owned) has grown - and will continue to grow and grow as CRE defaults escalate. Most REO sellers have regulatory or contractual limitations on the time periods that they can continue to hold or own the properties – meaning they are motivated to sell the property.
This is no “ordinary” purchase and sale agreement (or a contract of sale) because the seller (as the former lender) did NOT develop or operate the project, nor own it on a “for profit” basis. Instead, the seller acquired it under circumstances where it was under performing and perhaps not well maintained. Consequently, the seller of REO has a very different agenda, approach and attitude toward the terms and provisions of the sales contract.
This different perspective is reflected in the following provisions of the REO sales contract:
- Sales Price: The seller wants to maximize its price, but with the recognition that it does not have sufficient knowledge about, nor experience in operating, the property. A key factor here also is that the “basis” of the seller’s investment in the property is the loan balance at the time the seller took title. Thus, if the loan balance is less than the market value of the property, the seller might consider selling at a sales price below market value. In other words, the seller wants to recover its debt investment, and typically is not looking to make a profit.
- Regulatory and Contractual Limitations: The seller’s approach to the sales price will be governed by the overlay of applicable contractual limitation and any regulatory restrictions. So, “yes” the buyer can get a “deal” in buying REO; but the basis for the deal will depend upon seller’s unique regulatory circumstances and contractual obligations.
- Quick to Close: Most REO sellers will require the buyer to quickly go “firm” on the contract, and then to quickly close. Consequently, some sellers furnish the form sales contract to bidders on a “take the form unchanged, or don’t bother to bid” basis, and even tell all bidders that the bidder with fewest comments to the form will be given “preferential” consideration when the seller evaluates all of the purchase offers. Also, some REO sellers make due diligence materials (title, survey, environmental reports, rent rolls, etc.) available to prospective buyers in advance of signing a sales contract.
- Limited Buyer Remedies: The sales contract will limit the type of remedies for Seller’s default under the contract. The buyer remedies will not include damages (since its business plan is not that of an investor in real estate) and will be limited to these two remedies; buyer may terminate the contract or sue for specific performance. The seller will NOT be liable for any damages.
- AS-IS: Seller will minimize the amount of responsibilities on its part in the sales agreement. For example, the sale will be “AS IS, WITH ALL FAULTS” with respect to the property condition. And it can only turn over the operating information in its possession; thus, historical operating information might not be available.
- Confidentiality: the seller should insist upon confidentiality, both at the pre-contract stage, during the due diligence period and after the closing of the contract. Thus, confidentiality will survive the closing.
- Qualifying the Buyer: Many REO sellers require that the prospective buyer furnish information, or access to information, in support of the buyer’s ability to actually close the purchase. For example, the prospective buyer must authorize credit and background check, and also furnish current financial information.
- Expenses: Simply because many REO sellers to NOT have a ready source of funds, the sales contract will require the buyer to pay all closing costs. Thus, the sales price will take this into account.
If you have additional items to add to this list, please comment below.
