Often buyers will ask if they should consider buying a foreclosed property? They want to know what the risks are? If they can lose their deposit? Can they have contingencies in the Purchase Agreement? Would it be better to buy at the foreclosure auction?
Usually I answer by saying there are some fabulous buys out there in the foreclosed property arena BUT you need to have a stomach of steel and a ton of patience. For example, this company purchases houses in Orlando no matter their condition, and flip them for a profit, but they have massive resources, contacts and networking in place. Nothing happens fast when dealing with a bank owned property….unless of course if they want to foreclose on you, sorry I am being sarcastic here, but it sure does seems true. If you are a homeowner facing a potential foreclosure please read this post on Foreclosure? Don’t Go It Alone.
There are many Pitfalls when buying a bank owned home and a huge amount of disconnect and yes incompetent people including real estate agents ,I’m not going to sugar coat it. There are some crappy real estate agents running around.
If you’re thinking of buying a foreclosure property then this is an excellent article full of timely and important advice. It was written by Andrew Cadorette, Education Coordinator, New Hampshire Housing Finance Authority and is published on NH Realty Scoops with his permission. As Andy said the more people that read it the better it is.
Is buying a foreclosure property a good deal for first-time buyers?
As the inventory of properties on the market increases, new home buyers may consider foreclosed properties as a viable housing choice. Is buying such a home a good deal? There are pros and cons home buyers need to consider when purchasing a foreclosed property, and there is no simple answer to this question.
A foreclosure occurs when a bank repossesses a home from a borrower who has failed to live up to their obligations on the mortgage note. The foreclosing bank then offers the home for sale at a public auction known as a foreclosure auction. Whoever is the highest bidder at the foreclosure auction purchases the property “as is” and is awarded title to the property with all liens and encumbrances that come with it. Many times the bank holding the note on the property is the highest bidder at the auction. In this case, the property becomes “bank owned” or “Real Estate Owned” (REO) property.
For the average first-time home buyer, purchasing a home at a foreclosure auction is a risky endeavor. Two potential pitfalls are buying a property without the opportunity to complete a home inspection or buying a property without even entering the home. You won’t know about any major repairs until it’s too late. Another concern is the possibility of losing your deposit if you are unable to obtain your mortgage financing by the date agreed upon at the auction sale. Additionally, when purchasing a home at foreclosure auction, you become responsible for all outstanding liens and debt against the property (such as unpaid property taxes). And if the former owners are still living in the home, it is your responsibility to evict the current occupants in accordance with the law.
A better option for the first-time home buyer may be to purchase a bank owned property. Typically, once the bank owns the property, they address any outstanding issues including: paying all back taxes and liens, resolving any legal issues and providing basic maintenance on the property. With a bank owned property, you also gain the ability to have a home inspection done as a contingency to purchase. With that said, an REO property should still be viewed as a potentially distressed home in need of repair, because many times these properties are vacant for months. The longer a building is vacant the more likely it is there will be maintenance issues. Another consideration is that in cooler climates, such as ours, the bank may choose to turn off the home’s heating and water systems and winterize it. Beware that unless you negotiate the expense up front, you may become responsible for paying to turn those systems on and off again to conduct a proper home inspection.
When purchasing a bank owned property there are two words to keep in mind: communication and patience! There are many people involved and many decisions to be made by the bank and its investors before an REO property can be sold. By working with an experienced Realtor®, one who has dealt with bank owed properties before, you can minimize your headaches and anticipate bottlenecks throughout the process.
Purchasing an REO property also requires special negotiating skills. The selling price is set by the bank to get the most money with the least hassle. Telling the bank how much you love the property will not impact their decision. Again, this is where an experienced Realtor® can help. If the home is priced right, there is no need to place a below cost offer. Also, if it seems priced exceptionally low, you need to find out why as there may be issues with the property. What affects the price most is the changing mortgage market and the number of days the property has been on the market.
The fewer contingencies you have in your purchase and sales agreement when making an offer, the better it is for the bank; however, it is a greater risk for you. You need to find a balance between what you can live with and what you need. Many times, banks selling REO properties are unwilling to renegotiate issues that come up after an original offer is made and accepted. Selling banks have committees or individuals that review each offer on REO properties. Adding contingencies increases the time needed to review your offer, so get it right the first time. Also, be prepared for delays on the selling side when purchasing an REO home. If you need to move into your new home on a certain date, then a bank owned property is not for you. Remember, communication and patience is required when purchasing a bank owned property.
On the mortgage side: when looking to purchase a bank owned property, not only do you need to qualify for the mortgage but the property needs to be qualified for the mortgage. Do not make an offer on a home until you are pre-approved for a mortgage. Understand and know the limitations of your mortgage. If you need bank approval or a home inspection on a property, write that into the purchase and sales agreement when you make your offer. Also, on the day of closing, always do a walk through of the property first. If the property has been vacant, there may have been changes to the property since your last visit.
Good communication between you, your Realtor® and the bank that owns the property will help to make your purchase go more smoothly. Understanding each party’s abilities and restrictions will also help you throughout the process. The Realtor® cannot make any decision about the property. Offers to purchase must be reviewed by the bank and, in some cases, its investors. To make matters even more difficult, there may be a servicing company in between the bank and the mortgage investor. These many layers of people may slow down the process. Effective communication and understanding possible issues up-front can help to speed up decisions.
Buying a bank owned property can be a good deal for a home buyer who has financial resources and time. The risk of buying a “money pit” can be real if you do not educate yourself and take all precautions to ensure that you are buying what you think you are buying. With a little work, purchasing a bank owned property can be a worthy investment opportunity if you have patience, good communication and an understanding of all the risks.
Pros to consider when looking at a bank owned property:
Good value for the price
Listed by a licensed real estate agent
Ability to view property prior to offer
Ability to have a home inspection
Cons to consider when looking at a bank owned property:
Property is distressed and may be in need of major repairs
Purchasing home “as is”
Unexpected delays in closing
May need to pay for an extension
Article written by Andrew Cadorette, Education Coordinator, New Hampshire Housing Finance Authority