Eight Things to Consider When Buying a Foreclosure
1. How do you go about finding the best foreclosure in your area of preference? It’s best to work with a real estate agent that specializes in foreclosure, bank owned home, and REO’s. A knowledgeable real estate agent can assist you in identifying foreclosures that meet your requirements. Most bank owned homes are listed in the MLS (the Multiple Listing System) and flagged as a foreclosure or in some other way identified as distressed homes. Often bank owned homes will be priced lower than competitor properties in the same neighborhood. These homes are likely to be aggressively priced since banks don’t really want to be property owners. Well priced REO homes, those priced below market, often “go under contract” quickly – so – work with a real estate agent that can send you automatic updates on properties that meet your requirements for price, location, and features (bedrooms, bathrooms, garages, etc.). Your buyer agent can give you advice on price and terms by providing you with comparable sales data for the neighborhood, sub-division, city or town.
2. When you buy a foreclosure, bank-owed, or REO (also known as “real estate owned”) home you are purchasing a home that has been acquired through foreclosure, deed in lie of foreclosure, or forfeiture by the homeowner. So, when it comes to negotiating price and terms, you’re negotiating with a business that’s focused on it’s bottom line and does so without much emotion – unlike dealing with Sam and Sally who’ve lived in their home forever and raised their family there and have so many memories about all the great things that happened there; emotion, emotion, emotion! So remember, the bank is focused on the net sales price after concessions, commissions, transfer and recordation taxes, and incidental expenses.
3. Most banks will require you to agree to and sign their contact of sale in addition to the contract you will prepare with your real estate agent. Sometimes call “corporate addendums” or “bank papers”, their provisions are attached as an addendum to the contact you’ve submitted and will supercede and negate terms and provisions in the main contract. If you think about it from the banks perspective, they’re dealing with contracts from all over the U.S. and they’re not going to take the time to have a legal review of every contract that comes, so viola, they’ll counter back with their contract as an addendum to your offer to purchase their home. So read their contract of sale carefully and seek advice from qualified legal professionals on any questions you have about their contract.
4. Most banks will want you to settle the purchase of their foreclosures within 30 days. However, it more realistic to negotiate 45 or more if you can get it. Why? The contracts to sell the REO property will have to be signed off on by the bank. Once you’ve negotiate the deal, all of which is often done verbally, then the bank will counter back with their paperwork – which you’ll need to read, understand and sign – which can take a week or more depending on the bank and time of year. Most banks are good on their word, and, if the listing agent says the agreement, then the paperwork will follow. However, it’s not done until its signed.
5. Buyer beware! Unless you’re planning on tearing the house down and rebuilding on the location, conduct a thorough home inspection of the property. Banks generally sell property “as is”, which means that buyers accept it “as is” and the bank will not fix any problems before or after sale and settlement. Keep in mind foreclosure properties are sold in “as-in”, may have sat vacant for months and sometimes years during which a wide variety of problems can occur such as frozen plumbing pipes, water leaks, overgrown landscape, and more. So, get a thorough home inspection. A home inspector can tell you about the condition of the property, the structure and the mechanicals. You may need to pay yourself to have the electricity and water turned on at the property – and – depending on the time of year, pay to have the property de-winterized and re-winterized. So, expect to cover those costs out of pocket in addition to any costs associated with any inspections you conduct as part of your due diligence before completing your purchase of a foreclosure or bank owned home. Most likely the bank won’t pay for any repairs, so if the refrigerator isn’t working or you can’t get the heat to come one, don’t expect the bank to make a repair. When it comes to health and safety issues, you might be able to negotiate a monetary concession from the bank to correct the deficiency – but – most likely only if it would hinder you or another buyer from getting a loan from another bank.
6. Offers contingent upon the sale and settlement of other real estate are unlikely to be accepted by the bank. So, you’ll need to be a “non-contingent buyer”, meaning simply your purchase of the bank owned property is not contingent upon you selling your home or breaking your lease. Your lender, the one you’ll use to finance the purchase, should state in your pre-approval letter that you’re qualified to purchase the home without any contingencies. Financing and appraisal contingencies will be accepted as will contingencies for termite inspections, home inspections, well water quality and flow and septic inspections (if the home is not connected to public utility services), radon and/or mold inspections.
7. You don’t have to use the bank’s title company, settlement attorney, or escrow company, nor do you have to use any other companies that are tied into the selling bank such as insurance companies. Sometimes banks will offer incentives for using their foreclosing attorney’s affiliate title company and cover the cost of title insurance on the sale or offer similar inducements when purchasing a bank owned home. If you decide to accept their offer to use one or more of their vendors or service providers, you might want to “shop their fees” to make sure you’re not going to pay more than you would if you ordered these services from your vendors and service providers of choice. There’s not a lot of difference in the cost of these services since many of the fees that appear on the HUD-1 (the accounting statement, if you will, documenting all the costs of purchasing a home) are set by regulation and are calculated as a percentage of the sales price. For example, transfer and recordation taxes are set the state and county and won’t vary from one title company to the next. So ask your real estate professional which fees are set by the vendors (such as abstractor fees, attorney review fees, and the like) and which ones are set by statute or regulated by law.
8. Who will represent you in the purchase of a bank owned foreclosure home? Maryland law provides for buyer representation in all real estate transactions. You can choose to work directly with the bank’s listing agent, but, they working for the bank to get the best price and terms, no you. Have a buyer agent means having a trusted advisor, expert facilitator, and skilled negotiator working for you in the purchase of an REO, foreclosure and/or bank owned home. When banks list their REO homes with a local real estate agent, there will also be an offer of compensation to your buyers agent. Source of compensation doesn’t determine agency, so the buyer agent your working with will receive a commission from the bank but still owes you care, obedience, loyalty, disclosure, accountability and confidentiality.
Do you think buying a foreclosure, bank owned or REO property is right for you? Are you looking for a fantastic deal in today’s Maryland real estate market and want to make the most money that you can buying a distressed home? If you want an automated list of the hottest bank owned, foreclosed and short sale properties in the area, then complete the form below, then click the submit button.