MoneyUnder30.com
MoneyUnder30.com

Bank Owned Homes: Should You Buy a Foreclosed Property?


Bank owned homes are still flooding our nation’s real estate market. For buyers who can handle risk, some are incredible deals. But if you’re gearing up to buy your first home, take a hard look at whether buying a foreclosed property is a good idea.

Although buying a bank owned property requires you to jump through a few extra hoops, if the price is right, the money you save will be well worth your time.

Here’s what to expect should you choose to purchase a bank owned property.

Bank owned homes are sold “as-is”

Banks are in the business of lending money, not maintaining homes. That means when a bank owns a home, it will not make any repairs to the property, regardless of any damage.

As a buyer, you still want to be sure to get an inspection, but you cannot expect to receive any money from the bank to make repairs or any repairs to be made for you. In some cases, you can use the inspection report as a way to negotiate a lower sales price with the bank, but only if there are not multiple offers willing to pay more for the property.

Make sure that you get the home inspection from a licensed inspector before closing on the property. One way to do this is to make the offer to purchase contingent on the home inspection. The home inspector will reveal to you items in need of repair such as a leaky roof as well as items that are not up to safety code like a water heater that’s not strapped up. Then, you can decide whether or not you are willing to purchase the property based on the new knowledge that the inspection report showed you. Not every bank owned property needs repairs, but many do.

Bank owned homes can take a long time to close

Just as in a traditional sale, after you make an offer on a bank owned home, the bank may reject your offer if the price or terms do not meet the asset manager’s satisfaction. They may also counter your offer to purchase.

If you and the bank agree on a price, then you wait.

Though not always the case, it often takes longer to close the sale when buying a bank owned property than when buying a home in traditional sale.

When you buy a home from a family, the sellers are typically motivated to close in 30 to 45 days (they want to move, too, or they’ve already moved and don’t want to pay two mortgages!)

But asset managers at banks often have backlogs of work (especially today), so getting everything done may take longer. Although a delayed closing could hinder your moving plans, some bank owned homes move as quickly as traditional sales. Much depends on the local market and the size of the bank.

Just because it’s bank owned doesn’t mean it’s a deal

It’s not wise to assume that all bank-owned properties are listed below market value or that you can make money automatically by buying an REO property, living in it and selling it a few years later. When listing a property for sale, the bank’s goal is to recoup as much of their money back as possible. Some of their properties go on the market for more money than they are worth, but they often drop the asking price after it’s been in the market for quite some time without any offers.

Get a comparative market analysis (CMA) from your Realtor or Broker before making the offer. If there are comparable properties in the same area with similar characteristics as the one you want to buy, selling for a significantly higher price, then you may have a good deal.

Next, be sure to take into account the cost of all the necessary repairs when buying an REO. Some may be major, such as roof repair, while some are likely to be purely aesthetic like painting the walls or redoing the carpet. If you’re experienced and can do the work yourself, think about the time it will take you and the cost of materials. If you’ve never done repairs on a home before, get a professional estimate, preferably a free one from a local contractor or a home improvement store, depending on what needs to be done.

Once you know what other homes in the area are selling for and you know about how much it will cost you to get the bank-owned property repaired, then you can determine the price you will offer.

Related Link (Bankrate.com): 7 steps to a great foreclosure buy

Have you bought or are you buying a bank owned home? How’d it go? What did you learn?

Get access to our best money hacks:

Join over 11,000 other young professionals and learn how to get out of debt by 30, increase your income this year and invest for financial freedom.




100% free! I will NOT spam you and I will NOT share your email.

About Sarah Davis

Sarah Davis is a real estate broker in San Diego, Calif. She enjoys helping both buyers and sellers and was voted one of the top 10 best real estate agents in San Diego in 2013 by Union Tribune readers. In her spare time she talks about real estate on a local radio show and manages her website RealtorSD.com.

Comments

  1. David Weliver says:

    I’ve had two friends try to purchase bank owned homes within the last year.

    One gave up waiting for the bank (several months). The other was successful and got a great deal, but the former owner is still living in the home, and now HE is the one that has to evict her.

    I, too, recently looked at one foreclosure but between repairs, concerns about getting a clean title, and a best guess on how long the process would take, I decided it wasn’t for me :)

  2. There is NO licensing here in the state of California for home inspectors. There are only certifications courses. If you choose to wait till you find one that is licensed then you will be waiting for a long time.

  3. You’re right Jennifer. There are licensed inspectors in other states but in CA there are certifications. I’d recommend a CREIA certified inspector in CA.

  4. When we used to work for real estate investor one of the ways we found homes was to develop a relationship with a good real estate agent. She would direct us to look at those properties where the homeowner was “in trouble”. Though this may sound cold-hearted, it was not. They were motivated to sell so they could avoid the foreclosure. They were willing negotiate a good price so as to be able to cover their debt and have some cash for moving. With so many houses now underwater in payments a short sale may be the answer. And, yes, always have an inspection. The couple hundred dollars you spend could save you thousands. Even if you don’t want to fix something now at least you know what’s coming down the road.

    • I agree that buying from homeowners “in trouble” not only allows you ro negotiate a better buying price but also helps the owner out of a currently bad but potentially worse situation. Nothing cold-hearted about that.

  5. Its so interesting that this topic is up right now. This is the first time I’ve been to this sight and I’ve actually been considering buying a foreclosure to resell. I live in San Antonio, so we still have a housing market ,albeit not as good as a few years ago, but not like the rest of the country. I can do most work myself, but want to work on it after work and on weekends. I can get the money to buy cash, but have heard you don’t always need cash to buy. I have plenty of money for repairs. Just basically seeing if anyone out there has any advice or warnings for some one in my position. I’m 27, own a hown with about 70k in equity, about 20k in 401k, and 10k in savings, 100k in mortgage debt, no other debt.

    • Matt, I just did a 3 part series on real estate investment based on my experience as a property manager. It may give you some ideas to think about and I’m sure Sarah would have more.
      http://inthetrenches2009.blogspot.com/2010/08/residential-real-estate-investing-part.html

      • Thank you, that was very helpful. Do you get 100% financing, or how much does closing typical cost. I know when I bought my house I spent quite a bit, but I put a down payment and paid all closing costs as part of the negotiations. I would like to get away paying as little up front as possible to save for repairs. Is there anything you recommend? Do you get a different type of loan when its an investment property?

        • Matt, I did not do the entire purchase but I know a couple things: 1. Yes, the financing companies look at a loan differently if it is not a primary residence and give higher rates. Have you thought about renting your own place out and moving to the “investment” so you can take advantage of owner occupied rates? 2.With so many houses on the market you would probably be able to find a turn key home that you don’t have to spend for repairs so the money on your down would go directly to principle. 3.Check the rental rates for the type of home and make sure that there is room for a positive cash flow with reserves. 4.Consider incorporating if you obtain multiple dwellings. 5. Build your team with at least a mortgage lender, tax advisor, insurance agent, and realtor. Even if you only want one house the professionals are a big asset. Hope that helps.

  6. Hi Matt! Great question. How long do you intend to hold on to the property before re-selling it? That has a lot to do with what type of financing you can get as well as laws to be aware of.
    Carol is right, if you do not intend to occupy the house as your primary residence you will have to check a particular box on the residental purchase agreement to let them know. If it’s all cash, no problem. If there is a loan involved, they will charge you about 1% higher interest rate typically, though that varies.
    Everything is situation by situation with REO properties as far as closing costs. There are some that may be willing to pay quite a bit towards closing, others will pay practically nothing. I understand the desire to save money up front so that you can make the repairs. Again, if you’re getting a loan and you do decide to put very little down just keep in mind the cost of interest for however long you intend to hold it.
    You asked about special loans. There is an FHA 203K loans for rehabbing properties that need repairs BUT the repairs do need to be made my a contractor and you have to be living in the house, so that may not be for you. Other than that you could choose to buy with cash, a conventional (20% down) or use private money as Carol said. I hope this helps. Let me know if you need a Realtor in San Antonio. It wouldn’t be me but I know of a few good ones :)

    • To answer Carol’s question, I’ve thought of that, but I’m only half way through the 3 years of the homebuyer tax credit, and don’t want to be stuck with that at tax time. Of course if the deal is right it may be justified.
      As far as how long I would plan on keeping it, I guess that would kind of depend, but I would like to own several different properties. Ideally I would be able to do it full time. Do you know any realtors in my area that specialize in finding and closing on foreclosed or other distressed property

  7. Yes I know a foreclosure expert in San Antonio, great guy. Email me Sarah@RealtorSD.com or call me (619) 254-5699 and I’ll give you his name, email and cell #. If you know of a Realtor you’d like to go with no problem either. Best of luck!

  8. Alicia Wilson says:

    I am a first time home buyer so I need a litte help with a question. I found a house through kelly realtors here in Waco TX but then I found out(through the realtor) it is a VA Forclosure through Bank of America my question is we have been preapproved though a bank here called members choice. Is there any reason why we can not go through our bank? Any help would be great. Thank you in advance!!

  9. Sarah Davis says:

    Hi Alicia. In some areas, it is legal for brokerages and banks to make you get a pre-approval from a preferred lender. Luckily, they cannot force you to use that lender, only to get a pre-approval. You can use whatever lender you like on the purchase of your new home. Good luck! :)

    • Alicia Wilson says:

      So just to make sure I have this right as long as I get preapproved through Bank of America I can then choose what ever bank I want to actually lend me? Thank you so much for answering so fast : )

  10. Sarah Davis says:

    You got it! No problem. Have a great day!

  11. DeShawne says:

    I found a home in forclosure and needs mayjor repairs that I’m willing to repair myself. I’m a first time home buyer. Can I asked the bank for a lower price?

  12. You are right! The very first thing to consider in buying a bank-owned home is to check the house itself. But, you have to remember that having an inspection report does not mean that you can ask for a lower price. There are other people who are interested and more willing to pay a higher price for that property, and most of the time; they are the ones being accommodated by the bank. So be sure to make an offer as soon as possible and show them that you are really interested to own that home.

  13. Hi, just wanted to say, I loved this blog post.

    It was funny. Keep on posting!