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Critical Facts to Know Before You Buy A Bank Owned Property

Buying a house from a bank doesn't work like buying a house from a private party.  But if you know the differences, a bank owned property can be an excellent opportunity.  The following information will help you understand what is involved in buying a bank owned home.
REO vs. Foreclosure

An REO (Real Estate Owned) is a property that goes back to the mortgage company after an unsuccessful foreclosure auction. You see, most foreclosure auctions do not even result in bids. After all, if there was enough equity in the property to satisfy the loan, the owner would have probably sold the property and paid off the bank. That is why the property ends up at a foreclosure or trustee sale.

Foreclosure sales begin with a minimum bid that includes the loan balance, any accrued interest, plus attorney's fees and any costs association with the foreclosure process. In order to bid at a foreclosure auction, you must have a cashier's check in your hand for the full amount of your bid. If you are the successful bidder, you receive the property in "as is" condition, which may include someone still living in the property. There may also be other liens against the property.

Since what is owed to the bank is almost always more than what the property is worth, very few foreclosure auctions result in a successful sale. Then the property "reverts" to the bank. It becomes an REO, or "real estate owned" property.

REO Properties for Sale

The bank now owns the property and the mortgage loan no longer exists. The bank will handle the eviction, if necessary, and may do some repairs. They will negotiate with the IRS for removal of tax liens and pay off any homeowner’s association dues. As a purchaser of an REO property, the buyer will receive a title insurance policy and the opportunity to investigate the property.

A bank owned property might not be a great bargain. Do your homework before making an offer. Make sure that the price you pay (if you’re successful) is comparable to other homes in the neighborhood. Consider the costs of renovation, including time to complete them. Don’t get caught up in a ‘bidding war’ and pay over market value. It’s an old myth that “foreclosures” are a bargain.

How Banks Sell REOs

Each bank/lender works a little differently, but they all have similar goals. They want to get the best price possible and have no interest in "dumping" real estate cheaply. Generally, banks have an entire department set up to manage their REO inventory.

Once you make an offer to purchase, banks generally present a "counter-offer." It may be at a higher price than you expect, but they have to demonstrate to investors, shareholders and auditors that they attempted to get the highest price possible. You should plan to counter the counter-offer.

Your offer or counter-offer will probably have to be reviewed and approved by several individuals and companies. Even once an offer is accepted, the bank may insert wording like “..subject to corporate approval with 5 days."

Exempt From Disclosure

Banks always want to sell a property in "as is" condition. They will allow you to get all the inspections you want (at your expense), but in most cases they may not agree to do any repairs.

Your offer should include an inspection contingency period that allows you to terminate the sale if the inspections reveal unanticipated damages that the bank will not correct.

Even though you agreed to “as is," always give the bank another opportunity to make repairs or give you a credit after you’ve completed your inspections. Sometimes they’ll re-negotiate to save the transaction instead of putting the property back on the market, but don’t take it for granted.

Whenever anyone sells a house in New York, they generally give the buyer a Seller Property Disclosure Statement.  This document describes what is included in the house, what is broken, and other legal and environmental disclosures.  The seller has to tell you about any defects he knows about, especially if they are hidden and you might not see them.  The seller can be held liable for defects that appear later that were not disclosed when you bought the house.

The exception to this law is an REO.  Banks are exempt from giving you a Seller’s Property Disclosure Statement.  For this reason it is absolutely imperative that you do a thorough inspection with a licensed inspector before purchasing any REO. 

Making an Offer

Before making an offer, have your agent contact the listing agent and ask the following:
  • Are there any inspection reports?
  • What work has the bank agreed to?
  • Is there a special "as is" form?
  • How long does it take the bank to accept an offer?
  • How does your agent deliver the offer?
Since there is no face-to-face presentation to the bank, provide the listing agent with a pre-qualification or better yet, a pre-approval letter and buyer biography. Make your offer easy to accept.

After the initial offer is made in writing, counter offers are made verbally until agreement is reached.  This is a slow process because the bank may be in a different time zone, or the responsible people are tied up in meetings. Some times it may be many days of verbal countering before a final agreement is signed by all parties.  During that time, there is a danger that another offer will come in better than your offer and the bank may accept it.  This is especially likely to happen if negotiations go over a weekend. The rule of thumb is to try to reach contractual agreement with the least amount of counters.

Possible Double Loan Applications

The bank will probably require that you get pre-approved with their institution within a few days of accepting your offer.  They naturally want to cut their losses on the property by making a new loan on it.  You will need to go through the loan application process with them, even if you get the loan somewhere else.  While they can ask you to apply with them, no one can tell you where to get a loan.  That is your choice entirely.

Not The Usual Contract

Every bank will have their own Addendum in addition to State Contract of Sale. It is critical that your agent read this form thoroughly to make sure your interests are protected. 

Multiple Offer Situations

Often times a foreclosure home is priced so well that several buyers may put offers on the same property.  In this case all buyers will be notified by the listing agent and they will be asked to communicate their highest and best offers.  Normally there will be a time limit for when these offers must be communicated back to the listing agent.  At the time that all offers are received back within the deadline set by the seller they will then be presented to the seller.  The seller will then choose which offer he/she deems to be the best overall offer and negotiations will commence with this buyer individually.

Hopefully these tips will manage your expectations. Remember that REO's sell at pretty close to full market value and are not the deals presented on late night television.