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Some potential homebuyers pass over foreclosures or buying a bank-owned home entirely because they are daunted by the special considerations that go into this kind of sale. Others might consider the same properties as slam-dunk bargains.
The reality is, there are a variety of substantial pros and cons that any would-be buyer should weigh seriously before purchasing a bank-owned property.
Yes, you may indeed (but not necessarily) get a great deal. You will also have to expect a drawn-out process and condition issues, and you’ll have to button up your insurance and inspection processes. Here, we break down the major pros and cons of buying a bank-owned property to demystify the process and prepare potential buyers.
What is a bank-owned home?
Let’s start with the basics. A bank-owned home, also known as “real estate owned” (or REO for short), refers to properties that have been foreclosed with the ownership transferring to the bank or lender.
If it does sell, the lender gets back some of the outstanding loan amount through the sale. If it doesn’t sell, ownership then passes to the lender and the house becomes an REO property.
The lender then attempts to sell it, a process which might include removing liens on the property and evicting its occupants. The lender may also make any repairs needed to ensure the house is livable before listing it for sale.
Why would I consider buying a bank-owned home?
Generally, people consider buying bank-owned homes with the hope of getting a good deal.
Like other sellers, banks are motivated: It costs the institution money to carry this property on their books. Plus, there is cost and effort associated with maintaining it.
So you may indeed score the home at a discount — but you’ll likely be buying it as-is, you probably won’t be able to negotiate much on the price the bank sets, and there are other potential pitfalls to weigh.
Consider the personal experience of top-selling Texas-based agent Mary Stewart. “Back in the ’80s, I bought a foreclosure and I stole it — I really got a good deal,” she explains.
“Of course, the condition was horrible. It had snakes. It had fleas. We had bees, and we probably had three gallons of honey come out of the ceiling. But it was well worth it, because we bought it for $250,000, and we sold it for $650,000.”
Her experience was with a foreclosure instead of a bank-owned property, but it illustrates the kind of things that can happen to a property when people are evicted — and also the pros and cons of signing onto this kind of deal.
What are the pros of buying a bank-owned home?
Let’s start with the major pros.
Getting a good deal on a home potentially means that you might be able to buy in an aspirational neighborhood that’s otherwise out of your reach, or buy a bigger house than you could have otherwise afforded.
You can also be assured that the bank will have the house inspected before it’s available for sale, so you’ll at least know what condition it’s in before you buy it.
“When the bank gets the property back, sometimes they do want to do some fix-up and make it safe,” Stewart says.
“For instance, if there’s a swimming pool, that’s really an issue, because the pool turns black. They have to either cover the pool, drain the pool, or fence it, because what if a child falls in it while Realtors show it?”
Unlike with a foreclosure auction, you can walk through an REO home before you decide to make an offer — so you won’t be flying totally blind when making this substantial purchase.
With an REO, you can also get the house inspected yourself after committing to buy it. And you should consider getting some specialty inspections to make extra sure you aren’t buying a money pit, especially with this kind of sale.
As well, there isn’t as much competition from traditional buyers for these homes, and investors may be looking for something different — so you might be in a pool of few interested buyers for the opportunity.
An REO should be free of liens or other title issues. And there won’t be any legal occupants in the house who have to move out before you can move in, because the lender will have already evicted the previous occupants.
What are the cons of buying a bank-owned home?
While there are potential advantages to buying this kind of property, there are also pitfalls to be aware of and avoid.
Although you might hope to get a bargain in an REO sale, there’s no guarantee that you’re going to get a great deal. So you’ll want to confirm that the price is fair. Order your own appraisal or at least get your agent to run a comparative market analysis for you. (You will have to do this anyway if you’re not going through the bank that owns the house to get your mortgage loan.)
The bank isn’t going to repair very much (if anything) before it sells. The property will be sold in “livable” condition — but of course what makes a house “unlivable” is pretty extreme, so “livable” is merely a relative term that may still translate to a ton of work for the buyer (potentially too much to want to take on and pay for).
Remember that the REO house will be sold in as-is condition; you won’t be able to request repairs. Get an inspection contingency so you can get out of the deal if there are serious issues that the bank missed. And you’ll want to do title research and get title insurance to protect yourself.
“You do want to get a good inspector, and of course, the title insurance will make sure all the taxes are paid up and current and there are no liens on the property,” Stewart says.
“It gets a little tricky,” she adds, in reference to another bank-owned property that interested her. “On this particular house, there was a first lien and a second lien. The second lien-holder was originally going to be the one to foreclose.
“Well, if the second lien-holder forecloses and you buy it, you have to pay off the first lien — and a lot of people don’t know that.”
The house might have been vacant for a while, and that can lead to issues. These can include pests — as in Stewart’s experience — leaks that went unnoticed, or even break-ins. You should expect to have to spend some money on repairs and maintenance, and include those in your budget.
Major issues unaddressed by the bank may reveal themselves. “The condition can be really bad because people are mad because they’re getting foreclosed on,” Stewart sasy.
“I have seen foreclosures where people have shoved their fist through one or two walls in every room. They will steal appliances, or maybe the house was left unlocked after they vacated, and appliances will be gone. I have also seen air conditioning units gone.”
Your correspondence will be with a banking institution versus a more accessible human-to-human experience. If you’re a novice, you might end up overwhelmed in an REO sale; these sales can test even seasoned investors’ patience. “The protocol for a foreclosure is such a long process,” Stewart says. “It takes a while.”
How do I get started if I want to consider a bank-owned home purchase?
There are online tips and tools available to help you find bank-owned homes. But the best way to get started is to talk to a real estate agent in your area who has helped other buyers in your shoes.
Sometimes if a bargain seems too good to be true, then it may very well be, Stewart says. “But if buyers have a decent Realtor, they should be protected.”
Header Image Source: (Sieuwert Otterloo / Unsplash)