What are foreclosures and bank-owned properties?
Real estate banks own properties because they acquired those properties through the foreclosure process. The foreclosure process occurs when the owner is unable to make payments on their mortgage. When this happens, the bank that provided the loan repossesses the home, as the home serves as collateral for the loan.
Once the home is repossessed, the bank – usually – will sell the home at a public auction in hopes of recouping the losses incurred when the owner defaulted. If the home does not sell at auction, it is listed on the bank’s records and referred to as a “real estate owned” (REO) property. A home may fail to sell at auction if no one bids the current loan value or because the bank started the auction with a minimum bid that was too high, leading no one to be interested in the home.
Why buy bank-owned homes?
If the bank is trying to recover its losses on foreclosed properties, why are there good deals available? There are two reasons that a bank-owned home can be profitable for you:
First, if a property has two loans secured against it (which is common these days), the second lienholder sometimes does not foreclose. If the second lienholder does not catch up on the late payments to the first lienholder and begins their own foreclosure proceedings, the second lienholder gets wiped out in the foreclosure process.
Second, banks often do not want to sit on their inventory. Knowing they did not receive any low offers from investors or homebuyers during the auction, there’s a good chance the bank may price this owned home at a steep discount to get rid of it.
How to find foreclosures and bank-owned properties?
To find foreclosures and bank-owned properties, you can either do the task yourself or enlist the help of a buyer’s agent.
Finding bank-owned property listing agents on your own:
There are many websites available online to find foreclosures. One of the best of these sites is the Multiple Listing Service (MLS), which helps connect buyers, sellers, and real estate agents. Search the MLS database for “bank-owned properties” to find agents in your area who specialize in this area. Once you identify some high-potential listings, it’s time to start reaching out to them.
There are several things you need to know about bank-owned property listing agents:
- Center of Activity: Most bank-owned property listing agents only list bank-owned properties, not other types of properties.
- Dual Agency: Bank-owned property listing agents make money by selling a variety of bank-owned properties or acting as dual agents. In the case of dual agency, the bank-owned property listing agent earns both the listing commission and the buyer agent commission.
- Commission: To attract buyer agents, many banks offer a higher commission percentage to the buyer’s agent with a reduced commission for the listing agent.
- Representation: Bank-owned property listing agents typically represent sellers, not buyers.
- Relationship: Bank-owned property listing agents tend to be reputable agents due to the volume of business they conduct. They usually don’t spend a lot of time working with buyers and may not provide much guidance and assistance.
- Contact: Some bank-owned property listing agents hire assistants to handle calls. Many do not give out their phone numbers, making communication difficult.
Better option: Hire a buyer’s agent to represent you:
Unless you have firsthand experience negotiating with banks, you may get better representation by hiring your own buyer’s agent. Before choosing an agent, pick several and interview them to find the right person.
Here’s
Some things you need to know about buyer agents:
- Fiduciary duty: The buyer’s agent has a fiduciary responsibility to protect your interests.
- Representation: The buyer’s agent does not represent the seller, even when the seller pays his commission.
- Costs to you: Typically, the seller pays the buyer’s agent’s commission. Hiring a buyer’s agent usually costs you nothing.
- Broker agreement: Buyer agents may ask you to sign a buyer broker agreement, which will outline the agent’s duties and specify who pays the commission.
- Agent’s experience: Look to work with a buyer’s agent who has experience dealing with bank-owned properties.
Negotiation Tips for Buying a Bank-Owned Home
Once you identify some interesting listings and find your buyer’s agent, you’re ready to move on to the next step: contacting the bank.
If the home listing is relatively new on the market, the bank may not be willing to budge much on its asking price. You will have more negotiating power if you make offers on homes that have been on the market for more than 30 days.
If you are targeting a certain price that would make the bank-owned property a great deal, don’t hesitate to ask for it. You have significant leverage. In addition to the property being foreclosed, it failed to sell at auction. The representative or agent you deal with is there to finalize the deal.
During this process, you should expect the following:
- As-is purchase: You will likely be asked to buy the home “as is,” and it may be in good or poor condition. Make your offer contingent upon a home inspection.
- Waiting game: You may find yourself waiting a long time when dealing with the bank. After being pre-qualified for a loan, you may be kept waiting for up to 10 days for the bank to respond to your offer. If the bank doesn’t budge, and you receive a rejection for your offer, wait another 30 days and submit your original offer again.
Unexpected Costs for Buying a Bank-Owned Home
Be aware that you may face unexpected fees during the transaction.
Be cautious that the bank may handle the transaction differently than your experience in buying a non-foreclosed home.
Banks negotiate bulk discounts with title and escrow companies. If you decide to use the bank’s title and escrow company, check the fees that those companies will charge you. Typically, the fees that the bank doesn’t pay but the buyer does are higher. This is because title and escrow companies often compensate for those discounts by charging buyers higher fees.
Expect the bank to put a purchase contract or addendum to your standard purchase contract. Read it carefully and consult a real estate attorney if you do not understand it. You can expect that the bank’s attorney drafted this contract, and it is unlikely to be in your favor.
Finally, some banks may not sign a counteroffer until all terms are agreed upon verbally between the parties.
Frequently Asked Questions (FAQs)
What is the difference between HUD-backed foreclosures and bank-owned foreclosures?
A HUD-backed foreclosure is essentially the same as a bank-owned foreclosure, but the mortgage covering the home was government-backed. This slightly changes the foreclosure process, although the fundamental workings of the process are the same. When a foreclosure is purchased with a government-backed loan, the bank-owned foreclosure is listed in the HUD Home store.
How do I know how much I should pay for a bank foreclosure?
Like any home, you can make an offer to pay any amount you think is appropriate for a bank foreclosure, but there may be another buyer willing to pay more. That’s why it can help to work with a good buyer’s agent. If the agent thinks the property falls within the price range you feel comfortable with, he can help you make a competitive offer.
Do you
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Sources:
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editorial process to learn more about how we verify facts and maintain the accuracy, reliability, and quality of our content.
Urban Institute. “The Effects of Foreclosures on Families and Communities.” Page 8.
Federal Reserve Bank of New York. “The Rotting Residential Real Estate: Dimensions, Effects, and Solutions.” Page
Source: https://www.thebalancemoney.com/buying-post-foreclosures-reos-1798183
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