Buying a bank-owned foreclosure is different. Not hard, different. There is a high level of interest by future homeowners to acquire a “deal-home.” Also, many professional investors still are very active in this sector. For some homes the competition is fierce, and the buyer who dreams of turning the “opportunity” into their home needs to be prepared for the potential challenges the acquisition process will present.
As an investment, experienced professionals know what to expect and how to create value. Most future homeowners (commonly referred to as owner-occupants) are not prepared for the patience and knowledge needed to successfully complete a foreclosure purchase. It is also important to clarify what defines a foreclosure as the market has changed significantly. A foreclosure is a home whose last owner lost the home to foreclosure. Not so long ago, the seller for these homes were blanket identified as “the bank”. Due to the bank ownership, the commonly used bank accounting acronym REO (Real Estate Owned) became the quick way these homes were identified. In the last few years, the professional investment entities, many of them Wall Street based hedge funds, have purchased actual defaulting notes from banks and government entities (HUD, Fannie Mae, Freddie Mac). These entities often take a different liquidation approach. They may completely rehabilitate the foreclosed home and either sell or rent it. For the purposes of this post, a foreclosed home (REO) refers to a bank or government entity owned home.
Some of the banks and government owners of REO property make repairs to allow the home to be financed for the owner-occupant purchaser. The decision to rehab also eliminates the investor from the potential purchaser pool. There are many advocates to this approach. The direct sale to homeowners (owner-occupants) likely helps to stabilize neighborhoods. For the buyers, the experience of attempting to purchase one of these homes can certainly be different. The buyer needs to work with a Realtor that has experience in this type of sale and be prepared for the potential differences.
The following are what an owner-occupant purchaser, or their Realtor, should know prior to pursuing bank-owned properties. Not all homes will have been rehabbed. Many buyers want to handle that themselves. Discuss with your lender the capacity to complete any needed rehab and also the financing options that are available to accomplish a rehab.
Here are the six keys to understand about buying a bank-owned home.
As-Is Means As-Is
Unimproved bank-owned homes are sold as-is. The bank is not going to make repairs or representations regarding the condition of the property. The interested buyer will need to figure out for themselves the list of repairs needed. It is OK to include an “Inspection Contingency” in your offer, but be prepared that a large percentage of REO sellers will not accept these conditions. Even if such a contingency is negotiated, don’t plan on making repair requests based on this contingency. This is where “as-is” means “as-is”. The bank has already decided they are not going to invest more money in the home. The negotiated price should reflect the value of the home as it sits.
It Takes A Long Time To Get Answers
When you complete a real estate offer to purchase, one of the final terms is to identify a time for the offer to expire. In the world of traditional real estate, it is common to use 24-48 hours for a response. When making an offer on a REO property- build in a longer time.
The “Offer Expiration” term is really only for the buyer’s benefit. Sellers of REO homes do not care. I can’t think of a single bank offer system that wants to know how long the seller has to respond to the offer. The REO seller might respond in a day, they might respond in 10 days. Why? Lots of reasons that have nothing to do with the buyer.
You need to be prepared for this lengthened negotiation time frame. The delays could cause you to miss out on another opportunity. Often though the patience can pay off. It is important to go into the offer process with eyes open as to the reality of the response time in the contract.
Be Ready For Bidding Against Other Buyers
The high degree of interest in bank-owned REO properties means many homes offered end up receiving multiple offers. When this occurs most banks automatically tell us to set aside all the offers received, and place a deadline on receipt from these same buyers for their “highest and best” (H&B) offer.
Some buyers and their agents believe that the listing company has a duty to share with them what we know about where the seller wants a successful offer. As the seller’s representative, our objective is to obtain the highest bid possible so the response, if any, will not provide any insight. We are not going to jeopardize our seller’s position by revealing the amount they need out of the transaction! If we have terms to share they will be shared with all parties.
H & B does not just involve price. Terms such as financing, contingencies, time to close, and requested concessions, will all play into the entire fabric of what makes for the HIGHEST and BEST offer. Respond to a H & B request with the offer that you know you would not, or could not, go any higher in order to obtain this property. This is the sweet spot that truly allows you to sleep at night knowing you offered the most you would for this property.
If the game of Highest and Best is not one you like the sounds of, then buying bank-owned REO properties may not be right for you. Sometimes H & B situations end up with an over-list price accepted offer. So, don’t let the list price weigh too heavily in making your offer.
Get Pre-Approved or hold a POF
A POF is a “proof of funds.” Banks do not like to accept an offer, take the house off the market, and then find out that the buyer can’t perform due to financial reasons. Therefore, the REO seller requires evidence that the buyer has funds available to complete the purchase.
The POF requirement will need to be met usually with a letter from the actual entity producing the funds. This letter can say that the buyer is approved to buy the property at a certain address up to the list price, or if the lender does not mind updating their letter, just have them state the offer amount. The key components of this letter are:
- Lender Letterhead
- No more than 30 days old
- State a dollar amount
- Provide contact information
If the buyer is planning on using cash, they need to provide evidence of the existence of this cash. I usually suggest taking a copy of the bank statements that document the existence of the funds and blacken out the account numbers and any other private information. These bank statements need to be in the last 30 days also.
Before an REO buyer starts looking, getting a proof of funds to go with any offer is a must. You really are not prepared to make an offer on a bank owned home if you have not got your POF.
Before anyone asks- NO! Photo copies of actual cash will not qualify as a POF!
Seller Concession Requests
Terms matter, particularly with the possibility of multiple offers. So, if you are short on cash to pay closing costs, for instance, try to figure out a way to get those paid without asking the seller. The request will place your offer at a competitive disadvantage. Banks evaluate bids in one way. How does it affect the net cash the seller receives?
Many REO sellers take the cleanest offer- even if the net is less. Multiple offers provide this opportunity to be choosy. It is not uncommon for the REO seller to remove concession requests in a counter offer. The request for seller concessions sends a message about the strength of the proposed purchaser.
The best offer is clean and competitive with plenty of evidence you can perform. Provide that and you stand the best chance of obtaining a great deal on a bank-owned REO property!
Inspection contingencies are a hot button issue. Banks indicate homes are sold as-is. Agents seem to misunderstand the difference in encouraging a buyer to obtain a home inspection and having an inspection contingency in a contract. There is a big difference and buyers should understand how this is one of the biggest differences between buying an REO and a traditionally sold home.
With a home inspection contingency, Sellers agree to provide a limited time frame for a buyer to inspect and then decide if they wanted to proceed with a sale. The buyer might ask for certain repairs to be completed by the seller and the seller will either agree, cancel the contract, or negotiate a successful agreement for the repairs.
In today’s competitive REO sales market, we commonly witness buyers making offers on properties sight unseen. These offers are utilizing the inspection contingency to buy time to decide whether to complete the purchase if the offer is accepted. In other words, they are simply a contingency for the buyer to inspect the property! This was never the intent of an inspection contingency! After experiencing buyer cancellations in excess of 50% of accepted offers, the banks got wise to this strategy.
If you choose to use the inspection contingency for the purposes of waiting to inspect the property yourself, then be prepared to lose your earnest money. Banks are only executing contracts upon receipt of non-refundable earnest money. When a buyer elects this tactic, they will likely loose their earnest money if they choose to cancel. Knowing this strategy is being utilized by buyers, banks are insisting on quick delivery of contracts and earnest money. If these documents are not executed and returned to the bank on average within about 48 hours of acceptance, the banks are cancelling the deal and moving on to the next offer. This practice increasingly makes it difficult for a buyer to use this “delayed inspection” contingency strategy.
Many REO sellers simply will not accept an inspection contingency. For instance, HUD homes are sold with no inspection contingency but HUD encourages all buyers to obtain an inspection and allows 15 days to do so. Buyers may believe this is a contingency but it is not. With this type of contract, the buyer’s earnest money is at risk. The buyer still is encouraged to decide if they wish to complete the sale by completing an inspection.
You Are Now Ready To Make An Offer!
Having read through this entire post, you should understand these six keys to successfully buying a bank-owned home. You have all the tools you need to get prepared to look for your new home. Happy house hunting-there are deals out there waiting for you!