6 Basic Tips for Buying a Bank Owned Home

by Xin Lu on 3 December 2009 9 comments

Currently many homes for sale are owned by banks. These properties are also known as real estate owned or REO and they have gone through the foreclosure process. Some of them are in very good condition and can be good deals. However, those who try to buy these homes will find that it is not as easy as it looks. Here are some quick tips for those interested in buying a bank owned property.

Do your own research.

This step is paramount for anything you want to buy. You should find out if the house is right for your needs and also any history on the property. You can often find out how much money the bank was owed on the home through public records as well as the current market value of the home through comparable sales. Additionally, sometimes you can find out which bank owns a particular property and contact an asset manager directly about a specific property. Find out everything you can about a property you are interested in before taking the plunge.

Have as much cash as possible.

In my earlier article discussing buying a home with cash, I wrote that having cash gives you the power to negotiate a better deal. This is certainly the case in bank owned homes. Many bank owned homes are snatched up by investors who are paying in cash and they are often not the highest bidder in multiple offer situations. If you have the cash, then the more power you have. Banks want to close deals as soon as possible so they recover some of their capital, and those with full cash offers are more likely to score the deal. If you do not have 100% of the cost, then a good sized down payment is also good.

Contact the listing agent directly.

A couple I know made offers on many REO properties with their own agent and had no luck because their agent was not experienced in REO listings. They basically ran around for several months without getting any results. I suggested that they make an offer with the listing agents directly and they were successful in buying a REO property they wanted fairly quickly. The issue here is that California allows dual agency and the listing agencies can take commissions on both sides of the deal. In the Redfin forums, many Californian buyers say that making an offer with the listing agent directly is the only way to make sure that the offer makes it to the bank. Additionally, banks work with a specific group of agents they trust so if you establish a relationship with these REO listing agents, it is likely that you will be offered new listings when they come on the market.

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Make reasonable offers and be patient.

There is no point in getting into a bidding war and offering too much for a property. If you have a good financial profile then it is possible that the bank will still accept your offer even if it is lower than the highest bid. If the person who submitted the highest bid could not secure financing then it is possible that the property will go back to market down the road. This happens quite often and sometimes you can get an even better deal by being patient. You do need to make a reasonable offer by researching comparable sales. An extreme lowball offer on a REO listing is unlikely to be accepted since they are usually already priced below market.

Make an offer as soon as possible.

Currently REO listings are selling very quickly so you need to act fast. If you are interested in a particular property, set up a viewing and decide on making an offer soon after the viewing. Supposedly many investors are making offers without even seeing the properties right now, but I think it is prudent to at least take one look at what you are buying. You should at least have an idea of how much work you need to put into the house.

Get ready for a quick closing.

After you have an accepted offer there will be escrow. Banks usually want the deal to be done quickly and some of them try to shorten the escrow period to 21 days and also shorten contingency periods. Make sure that you get the time you need, but have your ducks in order so that you can complete everything on time. Usually REOs are sold "AS-IS," which means that the banks probably will not cover any repairs. But it is possible to negotiate for the bank to cover some closing fees.

It is definitely possible to get a good deal on a bank owned home in the current market, but you would need to put in a lot of time and work. More often than not you will be competing with deep pockets, so it pays to have your finances in order. Always remember to never over extend yourself, and do not get discouraged if your offers are rejected.

What do you think? Have you purchased a bank owned home recently? What is your best tip for a successful transaction?

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Guest's picture
Guest

Great article! I bought a bank-owned home last year--as you said the escrow closed in 21 days and I had to scramble. One thing the Bank emphasized was the the property was AS-IS. The toilet leaked, the garage door spring was uncoiled and wouldn't open, and many other small things I knew I could easily fix or have fixed. To counter the As-Is condition, I asked the bank to pay for a one year Home Warranty and they did! It covered some things that broke after the move in. So don't be afraid to ask for that, even if the property is sold As-Is.

Xin Lu's picture
Xin Lu

Good tip.  The home warranty is a small cost to them and could save you thousands of dollars in repairs.  Congratulations on your purchase!

Guest's picture

Some people should have read this before they attempted the purchase, they would have made out a lot better.

John DeFlumeri jr

Guest's picture
James

Yes, I just want to say that bank owned homes may constitute a higher risk than other types of homes. The reason for this is that the previous owners, knowing they'll be foreclosed often have a disincentive to take care of the home. So, when you buy the home, the likelyhood is good that it will have been trashed.

Thanks,

James

Xin Lu's picture
Xin Lu

James, you don't have to buy the trashed homes so I don't really see that as a risk unless you are buying them without looking.There are plenty of REOs in move in conditon, but these have more offers.   

Guest's picture
Guest

I have read that it is virtually impossible to buy a REO except as a full cash deal. This article only says "more cash is better." So how practical is it to finance a REO?

Guest's picture
Buyer up north

... and the transactions could not have been much different.

The first house was for sale by a non-local bank. A non-local lender essentially means that there is no human being you can talk to. Yes, the bank is represented by a more local real estate agent, but they may have the same difficulty as you in actually getting to *speak* with someone if things go awry. Large non-local lenders often will lump several states together and leave one poor guy (or gal) to deal with dozens of long-distance transactions. Beware.

Our purchase fell through the cracks (their fault) just before closing. My real estate agent was a champ about pestering the selling agents and even people at the lender's closing company. But it seemed like everytime she related the whole story to catch someone up, they promised to look into it and we never heard from them again. After nine months of this revolving door and waiting for closing to be rescheduled, we gave up and cancelled the contract. The house went back on the market -- for about $30,000 less than we offered to pay them (!).

The second house was sold by a large but locally based lender. It closed within a month. Everything was handled promptly and smoothly. We even had someone to ask about a vacant-building fee charged by our county (they covered it, too).

Some lenders don't want to be in the house-selling business. Some can't get out of their own way. The best takeaway I can offer is to be patient, especially if the seller is out of town, and, for goodness' sake, don't buy a foreclosure or a short sale if you don't already have someplace you can stay for an indefinite amount of time.

Guest's picture

Online auctions such as the ones we have on our website at gohoming do create a way for lenders to optimize price of homes but keep in mind that all the real estate concepts are merely magnified with REO - the longer a property is on the market, the better deal you can get (http://www.gohoming.com)
GH

Guest's picture

I'm Buyers Agent in Laguna Niguel CA and working on my 5th Bank owned purchase for the year. It's due to close escrow next week on Tuesday. I love to represent buyers on REO properties it has become my favorite niche. You are correct these are not recommended for the inexperienced Agents with out supervision but it can be done. Of course the listing Agent wants to double end the commissions but the listing agent is the winner not the buyer.

The Listing Agent Represents the Bank and they will avoid helping a buyer get the best deal or help you get repairs or credits if they can get away with it. Trust me they want repetitive business from the banks and don't want to cut the hand that is feeding them all these listings. You will get the best deal and representation if represented by a experienced exclusive buyers agent.

Be careful who you chose because the bank addendum that the lenders make you sign before they accept your offer remove many of your rights. They are all different and most have a per Diem that will cost you if you don't close on time. Your Agent should study the bank addendum with a fine tooth comb because bank owned transactions can cost you thousands if just a simple screw up is made and the finger pointed at the buyer.

Also the Banks are forcing buyers to use the banks Escrow and Title companies and believe me; they have a one sided mind. They slow the transaction down making it almost imposable to close on time but a good alert agent will protect you from this unfair practice. From my experience the banks escrow and title companies work in the banks favor because they feed them with hundreds of repetitive transactions. They do not want to cut the hand that feed them ether.