Most prospective homebuyers not only want a house that fits them; they’d like a good deal, as well! If that’s you, you may have heard that one path to a deal is buying a bank-owned foreclosure.
There are pros and cons to consider when going this route, however, such as the fact that bank-owned properties often need more TLC than other homes on the market, and many are sold as-is. Let’s look at the ins and outs of bank-owned foreclosures and outline step-by-step how they work.
What’s a bank-owned foreclosure?
When a homeowner stops making mortgage payments, eventually the bank will foreclose on their house, and the property will become bank-owned. The steps in between the first missed mortgage payment and a bank-owned foreclosure follow a pattern like this:
- The homeowner fails to make at least three consecutive months of mortgage payments.
- The bank or lender files a notice of default, and the house is listed as a preforeclosure.
- A date for a foreclosure auction is announced.
- If the homeowner fails to catch up on their payments by the auction date, the home is auctioned for sale.
- If the home fails to sell at the auction, the bank or lender takes possession of the house.
- The home is now bank-owned (sometimes also called REO, or “real estate owned”).
Banks and lenders will often list these homes on their websites in the hopes of selling them. Often these properties are sold “as-is,” and they may be in a certain amount of disrepair, depending on how well the previous homeowner cared for the property and how long the property has been unoccupied.
If the former homeowner defaulted on an FHA loan, the home may become inventory for various HUD programs, including the Good Neighbor Next Door program.
The process of buying a bank-owned foreclosure
First, it’s worth noting that the term “bank-owned foreclosure” is a bit of a misnomer. According to top Florida Real Estate agent Troy Walseth, who has 27 years experience under his belt, “You really can’t buy a ‘foreclosure.’ You can buy a short sale, or you can buy a bank-owned property — but the foreclosure is just what’s happening in the process.”
Purchasing a bank-owned property is different than purchasing a home on the general real estate market. Usually when shopping for a home, you contact a real estate agent, they help you identify properties you might be interested in, you visit those properties, and then when you find one you like, you make an offer.
If your offer is accepted, you start the process of inspections, title checks, and negotiations while securing a mortgage loan and signing the papers when it’s all said and done. Bank-owned property sales work a little differently and can often take a bit longer. Here’s what you’ll be getting into.
Step 1: Find the right agent
A good real estate agent is your advisor and advocate in the homebuying process. You want to make sure to choose an agent who has experience with bank-owned property transactions. Not all agents do!
Consider using tools like HomeLight’s agent finder in order to find a qualified agent near you who understands these homes and this process.
Step 2: Consider dealbreakers
Bank-owned homes may not be the best-staged or the most recently renovated. In some ways, this can be good because it might make it easier to get a good deal, and it will also give you the freedom to make any updates or repairs to your specifications or preferences. But it’s important to know your tolerance level and how much might be too much to take on.
The bank may have made repairs to major issues that rendered the house uninhabitable, but they will likely have spent the bare minimum to make them. Take some time to think about what you want out of a house and what types of repairs or work you would be unwilling to take on, as well as what minimum condition you expect a potential home to be in.
This is important to do before shopping because it’s far too easy to get attached to a price point or superficial features of a home and become blind to its fundamental flaws. Making a list of deal breakers can help you filter out unacceptable properties before you can form an attachment.
Step 3: Find available homes near you
Now it’s time to begin your search. Ask your agent to find you bank-owned or REO homes on the MLS (multiple listing service) that meet your specifications.
Individual lenders may also have home listings on their websites. For example, Bank of America has a page where you can search for REO home listings by state and city.
Your agent is likely familiar with the best places to look for these types of homes in your area; after all, that’s why you went to them in the first place! If you feel like doing a little searching on your own, however, you can check out online listing portals, which will sometimes have REO homes listed.
Step 4: Narrow down your list of potential homes
Once you have cast a wide net, it’s time to start focusing your search. Make use of your agent’s insights as to which homes have the most potential. Things to consider during this part of the process include:
- What is the potential price of the house? Is it in your price range?
- Does it have the number of beds, bathrooms, and the square footage you want?
- Where is it located? What amenities are nearby, what is the neighborhood like, what would your commute be, and are the neighborhood schools good?
- How much does the house need in terms of repairs and updates, and how does this factor into your overall budget?
- Has the bank or lender attached any requirements or contingencies to the deal?
While you will likely have to purchase the house as-is, this is a good time to take a physical tour of your top choices in order to narrow your list even further.
Step 5: Determine the fair-market value of the homes on your shortlist
Each of the homes on your shortlist will already have a price assigned by the bank or lender. According to Walseth, “They’ve had two to three brokers and broker price opinions on these properties — what they should sell for as-is. So I think you’re most likely going to pay market value, whatever market value is at the time.”
That said, it’s worth asking your agent about doing your own assessment of the value, especially if the property has been on the market for some time. The agent may be able to run a CMA (comparative market analysis) for you, or you can spring for a full appraisal on your top choices.
Prices can be more difficult to negotiate on bank-owned properties for the reasons stated above, and also because any offers often have to be reviewed by several members of the bank, who all in turn have to answer to shareholders or investors. (This is one of the reasons why purchasing a bank-owned property can be a more time consuming process).
Your agent should be able to help you determine what offer to make initially, keeping in mind that if you come in under the asking price, it is much more likely to be countered than accepted. As you weigh your options, really take a close look at which of your top choices offers the best value overall and which one might allow for significant gains in sweat equity via easily implemented corrections.
Step 6: Start talking to lenders about preapproval
During a typical homebuying process, this step might come a lot earlier. But when searching for a bank-owned property, there’s a reason to wait. It’s often easier if you can work directly with the lender that currently owns the home you are interested in, so it makes the most sense to wait until you’ve identified your top choices first.
Contact the banks or lenders which own the properties you are most interested in and see what they can offer in terms of preapproved mortgage amount and interest rates, as well as what they require for a down payment. If they know that you are interested in one of their properties in particular, they are more motivated to offer good loan terms.
If you’re hoping to get a government-backed loan (FHA, VA) for the house, bear in mind that the home will likely have to be in good (for a bank-owned property) condition. This may mean that it needs additional repairs or fixes beyond what the bank may already have done.
It’s worth noting, however, that banks tend to be less flexible about additional concessions than a typical home seller. That said, if the fixes are small enough and are absolutely required by the lender for approval, according to Walseth, the bank will often step up and take care of it.
Step 7: Select a home to make an offer on
Decision time has arrived. Weigh all of the information you’ve gathered, make a list of pros and cons, and consult your agent for additional advice if needed until your top choice emerges.
Note that it is not advisable to make an offer on more than one home. You may have to put down earnest money on each, and if both offers are accepted, you may find yourself in a binding contract on two homes instead of one.
Step 8: Make the offer
At this point you’ve likely got a good idea as to what you think a fair price is, and your agent can help you write the initial offer.
Make sure the offer includes any important contingencies, such as an inspection contingency. This is especially important for bank-owned properties because they don’t tend to be in the best condition in the first place, and you want to be able to get out of the sale if the inspector finds big problems.
Like a typical offer, you will probably need to put down earnest money so the bank knows you’re serious. Once the offer is submitted, it can sometimes take a while to hear back from the lender. This is because more than one employee may need to be involved in the decision, and many of them often work through a third party. If a week goes by, consider asking your real estate agent to check in for an update.
If the bank receives more than just your offer, you may be required to bid against other buyers. When this happens, banks will set a deadline for the “highest and best” offer from all interested parties, and you will need to submit a revised offer.
Beware, however, of offering too much. There are other homes on the market. It’s usually not worth overpaying for one.
If you fail to have your offer accepted, you will need to go back to the drawing board, determine your second-choice home, and repeat the process again. Once an accepted offer is in hand, then it’s time to move on to the next steps.
Step 9: Order an inspection
You’ll want to know exactly what you are getting into before the deal closes. As previously mentioned, your offer should contain an inspection contingency, meaning that the property needs to pass inspection in order for your offer to remain valid.
Even if the lender has an inspection report from when the house transferred ownership, depending on how long that’s been, it’s always a smart idea to get your own. In fact, if you are going through a lender other than the bank that owns it, this may be a requirement for the mortgage.
If problems are found during the inspection, your agent can help you negotiate who may be responsible for fixing them, or can determine that the problem is too large and the deal is off.
Bonus tip: Get a licensed contractor to give you a quote for any repair needed and include the cost as an addendum to the contract.
Step 10: Get a warranty
Since there are a lot of unknowns with a bank-owned property — and even after inspection, hidden problems may still exist — it is a good idea to get a warranty on the home. It is unlikely that your bank will offer you one, so you will need to seek a warranty through a third party, such as Home Warranty of America, or another similar home warranty provider.
It’s smart to protect yourself. The cost of a warranty is often minimal, and it’s certainly less than any costs you might incur if the plumbing system goes bust a month after you move in.
Step 11: Pay attention to the title review
While the lender should have cleared any liens before accepting your offer, it’s a really good idea to make sure! A title review will document who else (if anyone) has a legal claim to the property.
You should also purchase title insurance so that you are protected if someone later claims rights to the property or a defect is found in the title history. Because bank-owned properties are usually associated with a previous owner who defaulted on mortgage payments, this is especially important.
Step 12: Consider ordering a survey of the property
Depending on how long the house has been bank-owned or vacant, you might want to additionally check on any easement or usage restrictions, or other possible survey issues, just to be safe. A home purchase is a huge investment, and the more steps you take to protect yourself, the less likely you are to run into problems later.
Step 13: Negotiate any final issues
Have you found any snags yet? You’ll have to talk to the lender about how to move forward — and just like accepting the offer, you can expect that to take some time! Maybe on the final walkthrough, you discovered the air conditioning was broken, or perhaps your FHA loan is contingent on removing some unsafe trees near the house.
While banks may be less inclined to tackle any big fixes, if something is absolutely necessary for the deal to proceed, concessions can be made. Your agent is your biggest ally during this process.
Step 14: Closing time!
Make sure all of your financial ducks are in a row and you are cleared to close with your mortgage loan. Ownership cannot transfer and a closing date cannot be set until your financing has been secured.
Some banks will charge you for every day that an REO deal goes over deadline if you delay the process, so keep tabs on your timeline and make sure you’re not incurring any unnecessary fees!
Though it may have taken longer than you would have liked, the day finally arrives when you meet to sign the closing papers. Hopefully, you feel confident in having done your due diligence and are secure in the knowledge that you got the home you wanted at a good price.
And once all the papers are signed — it’s yours!
A final word on buying a bank-owned foreclosure
Make sure you investigate all options with your real estate agent when purchasing a home. While sometimes bank-owned and REO properties are the source of great deals, there are many times when they may not be. After all, just like any seller, the bank would like to get the best deal out of the transaction, also. This is why having a trusted professional on your side throughout the process is indispensable.
Header Image Source: (Daniel Faust / Unsplash)