Buying REO New Construction

BROKER RISK MANAGEMENT

WEEKLY PRACTICE TIP

 Buying REO New Construction

 Q:  I am representing a buyer who is interested in an REO property in a newly-constructed subdivision where several homes were sold and the rest were foreclosed upon by the construction lender who is now selling them as REO properties.  Because the seller/bank is requiring my buyer to sign all sorts of “as is” and release and indemnity clauses, she is concerned as to what she can do if she finds construction defects after the close of escrow.  We have had the property inspected, but she is concerned that there may be latent defects that show up later.  She wants to know whether the “builder warranty” of the original builder is still active, and the builder will have to honor the warranty.  Also, she is concerned about the HOA and who is paying the HOA dues while the bank owns the property.

 A:  As you have indicated there is generally a limited one-year builder warranty on all new homes sold in California. 

            See Weekly Practice Tips:     “New Construction Seller Warranty”

                                                            “New Construction Law Details” 

However, the law known as Title 7 (previously known as SB 80, and found at Civil Code §895 et seq.), which provides for such a warranty on new construction, is not clear as to whether that warranty is applicable to a builder who has lost the property to foreclosure with respect to a subsequent buyer from a foreclosing lender. 

Of further concern in these situations is that the original builder may declare bankruptcy, in which case there may be nobody to pursue to repair construction defects.  This situation should also be discussed by buyer with their attorney. 

Finally, in such a purchase, many times the REO seller/lender will not fund HOA dues until the close on the sale of the unit (even though they owe the dues for the period of time that they owned the units).  Further, the prior builder who was foreclosed upon may not have had enough money to fund the HOA as required.  As a result, your buyer may be faced with owning a unit in a severely under-funded HOA. 

PRACTICE TIPS: 

1.  In ALL REO sales recommend that your buyer have the REO sale contract, or seller addendum, reviewed by an attorney. 

See Weekly Practice Tip “REO Sales” for an advisory to have your REO buyers sign so advising them. 

2.  In particular, if your buyer is concerned about what rights she/he may have vis-à-vis the builder on a warranty, or other legal theory, or their rights should the original builder be subject to bankruptcy, also recommend that your buyer discuss this issue with a qualified real estate attorney. 

3.  Whenever a buyer is buying into a subdivision, tell your buyer to pay attention to the HOA’s finances, and in particular when the subdivision, or a part of it, was subject to a foreclosure. 

 See Weekly Practice Tip “Buyers Should Check HOA Financials” This Weekly Practice Tip is attorney-client privileged and for the exclusive use of clients of Broker Risk Management and their agents.  It may not be reproduced or distributed without the express written consent of Broker Risk Management.  The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.

 Copyright Broker Risk Management 2009                                                                    1/23/09