Bank-owned homes also referred to as foreclosures can be a real good deal if you can manage the extra work and the risk involved. This is especially the case if you have been eyeing your first home. Before you jump into buying a bank-owned home, it is worth considering whether buying this type of home is the right decision.
Here is everything you should know before investing in a bank-owned property.
Properties whose ownership has shifted back to the bank or lender fall are considered real estate owned, or REO, properties. Property goes through different stages to qualify for REO:
REO properties are appealing to homebuyers or real estate investors as these homes are likely to be priced at discount.
Banks are for managing money, not homes. They neither invest time nor money in maintaining a home. You can still inspect the home, but the bank is not responsible for making any repairs. Don’t compromise on getting the inspection.
You can use the inspection report to negotiate a better deal. When you get the property inspected, make sure to hire licensed professionals. The inspector will let you know the underlying issues with the property. Keep in mind that not every REO property requires maintenance, but the majority of them do.
Buying a bank-owned home takes longer than buying a traditional home. When you buy a traditional home, homeowners are also keen on closing the deal sooner and usually try to get things done in 30 or 40 days. This isn’t the case with bank-owned property. When you make an offer, the bank may reject your offer or make a counteroffer.
Besides having to do more paperwork, they are not pushed by any urgency to sell. The delay may disrupt your plans to move in, so you need to factor that in. Although some deals manage to close similar to traditional homes, REO homes usually take more time.
You might be tempted to think that all bank-owned properties are sold at a cheaper price. This is not the case. The bank behaves similarly to the homeowner and wants to get most of its investment back. At times, some properties go at an even higher price, but in most cases, the sales price is below market value.
The best approach here is to involve your broker and get a comparative market analysis (CMA). If you find out the homes with similar features are being sold at a higher price then you may have a good deal.
Additionally, you also need to factor in the cost of making repairs based on the inspector’s recommendations before making an offer. Get a professional estimation of the cost of making the repairs and decide whether a bank-owned property makes sense for you or not.
If you have ever purchased a property using the conventional method, the process to buy a bank-owned home is similar. However, if you haven’t, here is how to do it:
There are various channels where you may explore REO properties, such as through REO listings in real estate magazines and in local publications, multiple listing service (MLS) platforms, real estate websites, or with the help of a real estate agent.
Once you have found a property, the next step is to arrange to fund. For that, you will be required to get a loan. Timing is very important when buying REO property, so you should stay prepared.
The best approach is to get pre-approval. Pre-approval is a process where the lender tells you about how much money you’re eligible to borrow. You first must provide your financial information and, upon reviewing it, the lender will determine your loan amount. Getting pre-approval makes you a serious contender for the property.
If you have not hired one yet, it is about time that you hire an experienced real estate agent. Buying a property involves technicalities and paperwork which you might not be familiar with. Agents are available to assist.
Make an extra effort to hire an agent who has experience in executing REO property deals to help ensure your REO purchase experience runs smoothly.
You never know if the house is priced right. It could be listed at a discount because of its location or it may need to be appraised at a higher value due to structural improvements. In either case, you need to make sure you are paying the right price.
Getting an appraisal is the best approach. You might have to spend a few dollars but it’s worth the investment.
Based on the appraisal value and after consultation with your agent, you should place your offer. However, you should build in an inspection contingency in the offer, which means that the offer is subject to the acceptable condition of the house.
Next, you should request the bank to let you inspect the property. You may do it by yourself but hiring professionals for the job would be in your best interest.
If your offer has been accepted and you are satisfied with the inspection report, it is time to claim ownership of the property. It works similarly to the traditional buying process where both parties sign over the transfer documents.
By now, you should have arranged the down payment as well as secured loan funding. You will be expected to complete all transactions with the bank that owns the property. Once all paperwork is complete, you will have purchased your first REO property.