We had bees, and we probably had three gallons of honey come out of the ceiling. Her experience was with a foreclosure instead of a bank-owned property, but it illustrates the kind of things that can happen to a property when people are evicted — and also the pros and cons of signing onto this kind of deal.
They have to either cover the pool, drain the pool, or fence it, because what if a child falls in it while Realtors show it? With an REO, you can also get the house inspected yourself after committing to buy it.
An REO should be free of liens or other title issues. While there are potential advantages to buying this kind of property, there are also pitfalls to be aware of and avoid. Order your own appraisal or at least get your agent to run a comparative market analysis for you. Get an inspection contingency so you can get out of the deal if there are serious issues that the bank missed. The second lien-holder was originally going to be the one to foreclose.
Note: An appraisal, which tries to estimate true home value, is different from a home inspection, which tries to take inventory of current and potential issues. An appraisal will help you decide whether or not the asking price is fair; an inspection will help you understand the repairs and renovations needed, which is critical for a bank-owned home.
Your agent will help you decide what kind of offer is likely to be accepted, put together the offer and submit it to the lender. Depending on the lender, you may need to submit special contract forms or paperwork. It is also common to attach an earnest money deposit check to your offer. Make sure to consider the inspection process as you are making your offer. You may choose to make the offer contingent on inspection so you are protected if the inspection uncovers significant and potentially dangerous issues.
If necessary repairs are well-documented, you can use that documentation to make your case for a low offer. Talk to your agent to understand your options when it comes to inspection contingencies.
An inspection should be part of buying any home, but it is crucial for bank-owned homes. An REO home may have been vacant for weeks or months, it may be neglected due to the homeowner's financial trouble, or the previous owners may have removed items or damaged the property before vacating.
Additionally, it's possible that the property has gone through non-permitted renovations. Having a home inspection done is the best way to take a thorough inventory of what repairs need to be made.
In some cases, the lender may conduct an inspection when the home becomes bank-owned. If so, make sure you get a copy of the inspection report and review it thoroughly to decide if it is comprehensive enough to help make your decision. For better or worse, negotiating with a lender for a bank-owned home is different from negotiating with a homeowner. On the other hand, banks typically take longer to respond to an offer or a question than a homeowner because the offer must be reviewed by several individuals or companies.
When the lender does respond, they will expect you to respond quickly to keep the process moving. Working with a lender also means jumping through more corporate hoops. Also, when banks lock out owners while taking possession of the property, the former owner may break a window or door to retrieve belongings.
In rare or extreme cases, previous owners may also purposely inflict damage at the bank's expense by putting holes in walls or tearing off baseboards and crown molding.
The previous homeowners might remove items of value from a foreclosed home, including appliances, fixtures, doors, copper pipes, and more. Anything that the homeowner does not take might be taken by thieves. Either way, many bank-owned properties are missing things that generally come with seller-owned properties. Despite all of these potential problems, foreclosures can still be a good deal. If you are willing to fix issues that most people don't want to deal with, then you can purchase a home at a significant discount.
However, you may encounter additional problems when buying the property and improving it to move-in condition. Buying a home from a lender has its issues as a result of the increased level of bureaucracy and the limited transparency afforded to those who buy foreclosures.
Lenders will not give homebuyers money for a dwelling that they consider uninhabitable or appraise below the purchase price. If you are an investor paying cash, of course, this will not be a problem. The HUD Section k program can also help in some circumstances. Common sense says that banks should want to unload REOs as quickly as possible, but in reality, banks sometimes drag their heels in considering offers and throughout the escrow process.
Since no one from the bank has ever lived in the house, they are unlikely to have any knowledge of existing problems with the property. You will have to uncover everything yourself during the home inspection, by asking neighbors, or through experience after you become the homeowner.
Because foreclosures can be great deals, they are attractive to investors looking to flip properties or use them as rentals. Since investors can make all-cash offers with fewer or no contingencies and fast closings, their offers may be more attractive to the bank than those from would-be owner-occupants. There is money to be made in foreclosures, but you should know ahead of time the challenge that you are undertaking and choose your property carefully.
Don't overlook the fundamentals that make a property desirable just because the purchase price is a bargain. You should also extensively research financing options for foreclosed homes. While you can go the traditional route of using a private lender as you would for a conventional home, lenders can sometimes be reluctant to finance a foreclosed home, so it is worth looking into loans from the Federal Housing Administration FHA or Freddie Mac.
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Check lender-specific listings. Ask a real estate agent. A real estate agent should be able to point you toward REO listings in your neighborhood. Review national real estate websites. That means holders of REO properties are eager to sell and will work to offload a property quickly.
That can mean a leg up on negotiations and potentially better terms for you. The price will likely be competitive: Because lenders are so motivated to sell, properties are usually priced lower than other homes on the market. Lenders still need to recoup their losses, after all. There could be other hidden costs: Aside from general repairs and upgrades that may be needed, there could be other costly issues. For instance, it could turn out that there is a lien against the property.
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