Buying a Bank-Owned REO Home in New Jersey: Key Considerations

Are you buying an REO home in New Jersey?

The process of buying bank-owned property in New Jersey has unique challenges, including buyer handling certificate of occupancy, the property being strictly “as-is”, and limited appraisal and mortgage contingencies. Learn more in the video or transcript below!

Buying, selling, or transferring real estate? Call us at 201-389-8275 or visit the Contact Us page for attorney assistance with real estate purchase and sales. Join our newsletter for regular updates on NJ real estate law.


Good morning. This is Earl White, Real Estate Attorney. This is a video about five things you need to know when buying an REO bank owned property. This is when the bank owns the property after a foreclosure has been completed. The process is pretty different compared to buying other types of property and other standard sales, so we’ll focus on five big things.

First, the attorney review process is very different. Normally, in New Jersey, once it goes into attorney review, the buyer’s attorney and seller’s attorney negotiate a “rider”, which is essentially an addendum to the contract, adding in any necessary changes and some customary changes. There’ll be a normal local attorney representing the buyer and the seller. With an REO property, bank owned property, the bank, the seller, is not going to have a local attorney. In fact, usually there won’t even be an attorney assigned. There’ll be some kind of asset manager, maybe the realtor will be managing it closely or another representative, but there’s not going to be any attorney for a buyer’s attorney like myself to negotiate with any special changes to the contract.

There’s not going to be another attorney that I could call and try to explain something unique about the deal. Any special customizations are not going to get put in during the attorney review process. That also means that there’s some customary protections I would normally add during attorney review that I would not be able to add in an REO sale, so something along the lines of appraisal contingency protections, extra protections for code violations, things relating to back due taxes that might come in the future, things of these natures, extra protections I would add if I could work with another attorney sort of like myself, they would understand.

With an REO, there’s no other attorney and they’re not going to be flexible on making any changes during attorney review. What will happen during attorney review though is that you’ll sign the normal realtor contract and then there’ll be like an addendum, like a bank addendum to the contract with some pretty heavy handed terms favorable to the bank. The attorney review is going to be more streamlined, it’s more of a take it or leave it. We really have to push for something, we can, but it’s going to be more take it or leave it on the bank’s terms in attorney review. That’s one difference is the attorney review process is just quite different and more stringent with the buyer having less room to make any changes to the initial contract or the bank’s addendum.

Another important thing to be aware of with the REO sales is that the timeframes are strict. Most of the sales that… Most of residential sales, the deadlines are flexible. They’re not “time is of the essence”. If a person misses a deadline by a day, you submit your inspection request a day late or your mortgage commitment’s a day late or you pass the closing date a week, not really a big deal because the contracts are set up that way.

REO deals are not like that. The dates almost always are set up to be time is of the essence. On the buy side of the deal, you almost always have more obligations. You got to do inspections, you do your appraisals, you get your mortgage. It’s more on your side, so you need to make sure you’re on point with all your dates and all your timeframes because there isn’t going to be much flexibility built into the contract.

REOs are also strictly as is sales. I know regular sales, even in the base realtor contract, paragraph 16 says, “Seller represents the sale is as is.” All the sales are generally as is, but oftentimes the buyer will make the point that, oh, we’re really going to treat this as an as is sale. We’re not going to make any requests for repairs. Once you start going down the sales process, buyer has an inspection, something new is discovered and you still might make a request for repair or credit or price deduction. With the bank owned properties, they are truly strict as is sales.

The bank is not going to change the price. They’re not going to start giving credits. To even get that, to even attempt to make that credit, it would be difficult because, as I mentioned, there’s no attorney for me to even submit a request for a contract addendum to. It would take the bank 10 days just to even consider the request, right? A quarter of the way to the closing it would take them to even just think about and make a decision on this. That’s how institutional it is.

They truly are strict as is sales, and that is also some risk for you putting time into the deal because given that it was an REO, the prior owner got foreclosed on, they may not have been taking the best care of the property since they knew they probably were going to lose it to the bank. There could be physical issues there. I mean most REO contracts do give you still a right to inspect and you still have a right to cancel and get your deposit back. Again, the bank is going to treat it as a true as is sale and is not going to negotiate credits or repairs.

Another big difference with these REOs sales is that the buyer handles the certificate of occupancy and smoke certificate. Most sales, 99, if not 99.9% of the time, seller generally has the obligation to get the certificate of occupancy, which is when a city inspector, you call the city billing department, they send inspector out to the property. They check for code violations, habitability issues, anything like that. They issue a certificate that says the property complies with a zoning code or something like that.

Normally seller responsibility. In the initial realtor contract, it is by default seller responsibility. REOs is the opposite. They’re going to push that onto the buyer and there is always heavy handed language in there. Again, you can’t really negotiate these things that well. If you’re going to do the REO sale, there’s risks here. They’re either going to shift the obligation to the buyer to pay for all the costs for the certificate occupancy and also smoke certificate, which is getting carbon monoxide detector, fire extinguisher, smoke alarms, et cetera, to the buyer.

Now, the risk here, and different sale, I would have protection, I could build protections for this, but not for this type of one, I would add something like buyer is… Say, buyers, “Okay, I’m going to take on responsibility for CO. Even though it’s not normal, that’s how I’m going to get my offer accepted.” I would add a protection like if the cost to get the CO to the buyer is greater than 2,500 bucks, then the buyer can cancel if the seller won’t kick in the difference. Right? That’s not going to fly in REO, that type of protection. Right? You’re going to have to take on the obligation to get the CO. If their costs come up and they’re more than 2,500, who knows what they could be, then if you don’t complete the sale, you could lose your deposit. That’s a risk that you take doing an REO deal.

The other thing I’m mentioning, the key difference here is there’s no appraisal contingencies. In the initial realtor contract, the word appraisal isn’t even mentioned, right? There’s no formal appraisal contingency included in the realtor contract, so you have to add that in attorney review. As I mentioned in point one in this video, you can’t really make much modifications like using attorney review riders for an REO deal. What about the appraisal?

For the appraisal, you’re not going to get an appraisal contingency for an REO deal. What it’ll come down to regarding the appraisal is that if the property appraises so low that your mortgage gets denied, then you can still cancel the deal and you can still cancel the deal upon getting a mortgage denial letter. If it’s really low, you’re not on the hook to move forward with the deal and make up the cash automatically, so you don’t have to make up cash, but it will just come down to if your mortgage gets approved or not approved.

The reason that is not great because, say, you’re putting 20% down, right? If it under appraises by, say, $20,000, you might still get approved for the same amount of the mortgage and not get denied, but you just would have less equity in the property. Instead of being a 20% down mortgage on the appraisal value, basically under appraised, maybe now you’re approved for the same amount, but it’s only 15% down on the appraisal value. Now because you’re not 20% down, you have to start paying PMI or get worse terms.

Again, you’re not going to get a formal appraisal contingency. You have less equity in the property, less terms, worse mortgage terms. It’s not an issue if you can get denied for the mortgage, but you might not get denied. You still might get approved for your mortgage even though it under appraised, in which case then you’re stuck with worse terms and no way to get out of the deal and just kind of have to eat the lower appraisal in that scenario.

Okay, hope this video was helpful. Let me know in the comments any questions about REO sales, how those contracts work. If you need help with any real estate deals, feel free to reach out 201-389-8275.

This blog applies to buying a an REO bank-owned home in Newark, Jersey City, Hoboken, Paterson, Elizabeth, Union City, West New York, Bayonne, East Orange, West Orange, North Bergen, Clifton, Bloomfield, New Brunswick, Atlantic City, and across Bergen County, Essex County, Hudson Couny, Union County, Morris County, Somerset County, Atlantic County, Monmouth County, Middlesex County, Ocean County, and Passaic County.

Buying, selling, or transferring real estate? Call us at 201-389-8275 or visit the Contact Us page for attorney assistance with real estate purchase and sales. Join our newsletter for regular updates on NJ real estate law.