Purchase a Bank-Owned Home with Eyes Wide Open

I’ve been working with a nice family—we’ll call them the Wagelhoops (because it’s fun to say while we’re protecting their privacy)—a young couple with two boys in preschool.

We’ve been searching for a house with four bedrooms and 1,800 square feet or more in a good school district. The Wagelhoops are fans of the Eichler neighborhood near John Muir Hospital in Walnut Creek, so we were intrigued by a bank-owned home that came on the market in that area.

The house was in severe disrepair, but the Wagelhoops were not afraid of a project—in fact, they had the vision to see that the home could have instant equity once their remodel was complete.

We wrote the offer in August and sent it to the agent representing the bank. There was a lot of back-and-forth—it took weeks to come to an agreement. But we finally reached a verbal agreement on price.

At that point, the bank sent a special contract for my clients to sign. Most banks work this way: The existing purchase contract that Realtors are familiar with is basically a backup contract—the bank has its own contract that will serve as the primary, and the standard contract will address terms not covered in the bank’s contract only.

I met the Wagelhoops at the house to sign the paperwork. Keep in mind that we have negotiated a price based on an “as-is” sale—and we have taken into account the severe disrepair: obvious dry rot everywhere and evidence of a leaky roof in almost every room.

When we walked into the house to sign the paperwork, we were surprised to find everything wet. Not leaky roof wet—lake in the living room wet.

I called the other agent who said, essentially, “Oh, yeah, we know about that.  Don’t worry, we are planning to fix it. It’s a leak in the radiant heat flooring. If it makes you feel better, you can put together an addendum that we will be repairing it.”

It certainly would make me feel better if it was in writing. In fact, this is the wording I used:

“Seller to identify and repair the source of the water leak that occurred while counteroffer negotiations were taking place; seller to remedy all water damage.  Repairs to be completed and inspected by an expert for verification before removal of all contingencies by buyers."

A note about contingency periods. The removal of contingencies is a huge step in a transaction. In a regular sale, it is done by the buyer signing a document by that name. A bank’s contract, however, will have a passive release of contingencies—meaning that once the date has passed, the contingency is released automatically.

This is an important difference when you are trying to protect your earnest money deposit. When I am dealing with a bank as a seller, I am very focused on its calendar.

In this case, the Wagelhoops did all inspections within the 10-day period required by the bank’s contract. They employed a radiant-heat expert to inspect the system. He was there for about 20 seconds before he said, "There's quite a significant leak."  

Then we started a difficult conversation with the bank. Our addendum, signed by the buyers and the bank, specifically said that the bank would repair the leak and that our expert would verify that it was done properly. The bank said it had repaired some leak, and suggested there might be two.

Well, maybe there were 50, but the point is that the Wagelhoops have bargained on a huge project including a failed roof and dry rot nearly everywhere, but they are drawing the line at having no heat in their home and a potential lake in the living room if they try to use their heater.

We attempted without success to negotiate with the bank, but finally, frustrated, the Wagelhoops canceled the contract.

Their earnest money deposit was being held by a title company in Stockton. Not my first choice, but often with a bank-owned home the buyer will benefit from using the bank’s title company. I had just sold another bank-owned Eichler in which my buyer saved thousands on escrow fees by using the bank’s title company so it seemed to make sense for the Wagelhoops to do so as well.

However, the supposedly neutral third-party escrow company turned around and sent my clients’ $5,000 to the bank. If you are saying “but they can’t do that,” you are right—it can’t release funds held in escrow without joint instructions from buyer and seller. Yet, it did.

I was pretty sure that once we called and explained the error the company would apologize and send the Wagelhoops their money. But no such luck.

Instead, Wednesday at 10:30 a.m. found me, my broker and the Wagelhoops awaiting justice in the Superior Court, Small Claims Division, in Walnut Creek.

That was my first experience in small claims court, and it was very entertaining. The judge declared at the outset that he was overwhelmed with cases and would be unlikely to complete them all. He spent about 20 minutes explaining how important it is for everyone to be concise.

In fact, we nearly ran out of time listening to him explain — with one vivid example involving a man, a convertible, a traffic accident, the sun in the man’s eyes, the teenager in the passenger seat about to graduate from high school — that the rest of us should get directly to the point. “Background information,” the judge said, “should come in back.”

He encouraged people to meet with a mediator to work things out, which, I’m happy to say, is how the Wagelhoops' saga ended. The title rep, recognizing that the judge was likely to rule against the company, capitulated moments before the judge called our case.

Best of all, the Wagelhoops have found a new home — we are in escrow for a great house in Lafayette in a cul-de-sac. Fingers crossed: If all goes well, the Wagelhoops will be enjoying their new home this time next month.