Korene's Blog

Buying a Bank Owned Home Can Be Great or Not So Great

August 22nd, 2009 4:00 PM by Korene L Clopine-Seaman

I want to send you a reminder that IF you are a FIRST TIME HOME BUYER -  if you have not owned a home for 3 years and mobile or manufactures homes without land do not count - you have less than 100 days to complete the process of purchasing a home to qualify for the $8000 Tax Credit stimulus incentive.  Call me today at 623-340-0934.  Let me help you get into a home and money to help you decorate it.

I recently wrote an article about buying a foreclosed home or potential foreclosure property,. In that article I discussed the various ways in which you could obtain ownership of a foreclosure. Here is a quick summary of the three scenarios:

  • A pre-foreclosure where you buy directly from the home owner before the bank takes over. (this usually is known as a short sale)
  • At an auction where you may be in competition with other buyers.
  • From a Real Estate Asset Management company or the bank itself. This is known as an REO aka Real Estate owned.

Here is what you need to know about scenario #3 ~ buying a bank owned home. The opportunity to buy a bank owned home is one that many buyers often consider due to the fact that there is a prevailing belief that you can buy them for 50 cents on the dollar or less. While as a general rule many bank owned properties do represent a good Real Estate value, you are more likely to be able to purchase one for around 5-20% less than the going rate for a similar comparable property.

Buying a foreclosed home however, is not for the timid at heart and there are many things that buyers need to be aware of going into a REO transaction.
One of the first things you should investigate when you become interested in an REO property is the present market value. This is something a skilled local buyer's agent can do find to help you. A realtor that knows the local inventory and recent sales data should be hired to help you with the transaction. I strongly recommend you engage a buyer’s agent. While a banks goal is to get rid of their REO inventory as fast as they can, do not expect the bank to consider silly low ball offers especially when the home is first listed for sale. In many cases the price has already been set aggressively to begin with. Like every other seller the banks goal is to maximize the price they receive for a property. I have never seen a bank accept anything less than 10% under the asking price but your buyer’s agent will be able to tell you how aggressive you can get with your offer.

What most people fail to understand is that banks have to demonstrate to shareholders, investors and auditors that they attempted to get the highest price possible. It is not uncommon for a bank to reduce the price of a home in their inventory after it has been on the market for a while. A bank after all is not in the business of holding or maintaining real estate. Do not make the poor assumption that banks are desperate sellers and will do anything to clear out their properties. This is rarely the case!

In order for a bank to consider accepting your offer you are going to want to make sure you have been pre-approved by a lender. Most banks will not even consider an offer without proper financial documentation. If you are making a cash offer with no financing contingency be prepared to show the bank proof that you have the funds in an account somewhere. Most banks will require this as well. Some banks may also ask you to get pre-approved through them as well although it cannot be a requirement to do so due to RESPA laws. RESPA stands for Real Estate Settlement Procedures Act as is designed to protect consumers.

Often times with a bank owned property patience is a virtue. In many cases the bank will take days to respond to your offer. Also remember that on weekends banks do not conduct business so you are losing a few days in the week. The process can be even longer if you find yourself competing with multiple offers on the property

When you buy a bank owned property be prepared to be buying it "AS IS". Most banks will not make repairs to a property unless it would effect the buyers ability to finance the property. Some of the things that more than likely a bank would be willing to remedy could include:

  • Structural issues
  • Toxic Mold issues
  • Termite or other insect problems
  • Plumbing or heating system issues
  • Electrical issues especially if it involves a safety hazard
  • Septic systems ~ some states require a passing inspection in order to close

While these are things many banks would consider remedying, don't assume that it would happen in all circumstances. Every bank is different in how they operate and make decisions. Do not expect a bank to make minor, updating, or repairs - it is not going to happen! You may be able to possibly get a credit for some repairs at closing but do not expect it.

Most banks have their own contracts that they use. You will be expected to sign their standard form and in most cases you will not be able to make any changes to it! I have seen attorneys and realtors try and more often than not they are rebuffed and their client’s offer is rejected. With a bank owned home you will just sign the banks form and that will be considered the Purchase and sale.

In most circumstances you will be given the opportunity to conduct inspections even though the property is being sold "as is". It is important that your buyer’s agent makes sure that you have proper contingencies in place that cover your ability to inspect the property for such things as the structure, pests, mold, radon , water, and others. You will want the right to terminate the contract if these do not meet local or national standards. Be aware that the bank is going to want these inspections to be done immediately.

Lastly, banks will prefer that the closing will be sooner rather than later. You will not see the same flexibility that you could possibly get with some traditional home sellers. As a rule of thumb, most banks will want the closing to take place in 4 weeks or less.

One really important clause that you find in many bank owned contracts is the penalty if you do not close according to the stated contract date. In most cases there is a $100 or more dollars a day penalty for not closing on time! You better make sure your ducks are in order when buying one of these properties.

One little known issue that most consumers would not think of but that has hit close to home with me is the lack of great representation of the part of realtors working with bank owned homes. Honestly, I have seen some of the worst real estate agent representation where the listing agents entire book of business is REO property. The issue starts with the fact that banks have not divvied up the business well. There are far too many realtors that have a stranglehold of all of a particular bank’s REO business. There has been some talk about banks breaking up the monopoly that some realtors have on the bank owned inventory but so far that has not happened.

The most important thing to remember is that while many bank owned properties can offer exceptional values there is quite a bit to know. It is very important to and in your interest of having professionals in your corner who can guide you and protect your interests is. I always recommend to my clients that they use a good buyer’s agent, especially when buying a bank owned home.

Once again, a reminder that IF you are a FIRST TIME HOME BUYER -  if you have not owned a home for 3 years and mobile or manufactures homes without land do not count - you have less than 100 days to complete the process of purchasing a home to qualify for the $8000 Tax Credit stimulus incentive.  Call me today at 623-340-0934.  Let me help you get into a home and money to help you decorate it.

Posted in:General
Posted by Korene L Clopine-Seaman on August 22nd, 2009 4:00 PM