Buying a Bank Owned Home
Without a doubt this is the strongest buyer’s market in memory. Historically low interest rates, coupled with declining prices and strong levels of inventory make this an ideal time to purchase a property. One of the most frequent questions I get from buyers is “How do I take advantage of this strong buyer’s market to invest in Foreclosed properties?” A significant part of my real estate practice at this time is the Representation of Buyers in the purchase of foreclosed or short sale properties. It is critically important that buyers be represented by their own agent when purchasing a bank owned or short sale property. Working with a knowledgeable agent who truly understands the process for making an offer on Foreclosure (REO) or Short Sale process will give you a higher chance of success in the purchase of this type of property.
REO vs. Foreclosure
An REO (Real Estate Owned) property is a property that has gone back to the mortgage company after an unsuccessful foreclosure auction. You see, most foreclosure auctions do not result in bids. Had there been enough equity in the property to satisfy the loan, the owner would probably have sold the property and paid off the bank. Indeed many REOs were on the market at one time as Short Sales (see the section of this website on Short Sales). 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, and HOA dues if the property is subject to them, plus attorney’s fees and any costs associated 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 the 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 liens against the property. Typically you do not have the ability to inspect the property in advance of the auction. 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 may or may not be a great bargain. Do your homework before making an offer. An agent representing you as buyer should be willing to do a CMA (Comparative Market Analysis) to demonstrate that the value is there. 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. Frequently we see REOs come on below market value to encourage multiple offers. This may result in multiple offers. Don’t get caught up in a “bidding war” and pay over market value. Your agent should be able and willing to demonstrate fair market value in writing for any property you are making an offer on.
If you are involved in a multiple offer situation all the buyers who made offers may get a response from the bank asking for their “highest and best” offer.
How Banks Sell REO’s
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. Having said that, they do not want to own real estate, they are in the business of lending money, not owning property. The longer a property sits on the market, unsold, the higher the bank’s costs of ownership. Generally, banks have departments set up to manage their REO inventory. They may work through an asset management company who facilitates this process for them. These departments or companies will be separate from the department negotiating short sales or doing loan modification. In fact one department probably does not know what the other is doing with regard to the property.
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 and 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 within 5 days.”
If you reach agreement on price and terms the final contract you are obligated to will, in all likelihood, not be the CA Residential Purchase Agreement on which you made the offer. It will be the bank’s own addendum and the terms will be favorable to the bank. It is critical that you and your agent are aware of all the terms you are agreeing to. Typically the bank’s addendum will supersede all the terms and condition of the RPA. It will include shorter contingency removal time frames, the passive removal of contingencies and a per diem penalty for not closing on time, regardless of who is at fault for a delayed closing. The bank’s contract protects the bank as seller more than you as buyer. If you buy a bank owned property be sure you and your agent understand everything you are committing yourself. This is where representation by an agent experienced in selling these properties is critical.
Banks always want to sell a property in “as-is” condition. Many will provide a Section 1 pest certificate, but not unless you include it in your offer and negotiate the point. They will allow you to get all the inspections you want (at your expense), but 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 renegotiate to save the transaction instead of putting the property back on the market, but don’t take it for granted. Banks do not want to see a lot of proprietary disclosures; they are exempt from the California’s Sellers Transfer Disclosure Statement (TDS-14), the Earthquake Hazards Report, the FIRPTA, the Statewide Buyers and Seller Advisory (SBSA) and the Seller Property Questionnaire (SPQ) and numerous other disclosures. If there are real estate agents involved, either representing you or the bank, those agents are required to provide you with their disclosure statements.
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?
Are there multiple offers?
Offers are usually input into an online “portal” which the listing agent and asset manager have access to or are faxed to the bank. The listing agent needs the offer on original forms. There is no formal presentation and no opportunity for the listing agent to give the bank a lot of input. Asset managers are simply looking at the numbers and will want the best price with the fewest obligations on the part of the bank. They may choose a lower offer which does not require they do any repairs. There will not be responses from banks on weekends, they’re closed. When your offer is submitted the following are typical to submit: Agency Disclosure (AD), Residential Purchase Agreement and Buyer’s Inspection Advisory (RPA/BIA), REO Advisory (REO), Wood Destroying Pest Addendum (WPA), letter of pre-approval, copy of MLS listings, copy of deposit check. Make your offer easy to accept. Remember that REO’s sell at pretty close to full market value.