By Rick Sheppard, January 14, 2019
Why do banks own homes?
Before you attempt to buy bank owned homes, it’s important that you know what a bank owned home is. Put another way, how is it that banks own homes in the first place.
When someone takes out a mortgage to buy a home, they also sign documents promising to pay back the mortgage based on agreed upon terms. Those same documents give mortgage lenders the right to foreclose on the borrower and the collateral real estate (house) if the terms are not met. Often that foreclosure process ends with the lender (bank) ending up with the title, or ownership, of the house. Banks are in business to lend money, not to own real estate. Consequently, when a bank ends up owning a house as a result of foreclosure, the bank will take the necessary steps to sell that house as quickly and for as much return as possible, turning “bricks and mortar” into liquid cash that can be loaned out. And that’s when a buyer will have an opportunity to buy bank owned homes.
Some other important terms
In addition to “bank owned homes” sometimes the terms “REO properties”, “REO homes” or “REO real estate are used. REO is an acronym for “Real Estate Owned”. The terminology is a bit strange as “BO properties” – Bank Owned properties, “BO homes” – Bank Owned homes or “BO real estate” – Bank Owned real estate would seem to make more sense. But the industry uses “REO” so let’s not rock the boat.
Marketing REO properties
When a bank puts a property on the market, the process is similar to how an individual puts their home on the market. A real estate agent is hired to list, market, sho, and sell the property. That same agent handles paperwork, negotiates an offer and coordinates the closing.
But unlike how individuals typically sell their home, there is no emotion from the bank employee (called the asset manager) who is working with the bank’s agent. The transaction is strictly business and while the bank naturally wants to get the highest price possible, the bank also wants to sell the property…and will sell it. No asset manager has ever said, “if we don’t get our price, no problem – we can live here for the rest of our lives”.
There are other differences between bank owned homes and individual owned homes, too. Often the bank doesn’t do any serious cleanout, clean up, or repairs before going on the market. Remember, these homes were previously owned by people not paying their mortgage. That means in the last year or so during foreclosure trash may have piled up, clogged toilets were left clogged, the exterminator contract was canceled for non-payment, damaged gutters were not repaired, landscaping has been neglected, etc, etc, etc. The bank may make the business decision to spend no money addressing these matters. Accordingly, prepare yourself, even brace yourself, before entering REO properties.
One more matter worth noting here: status of utilities. While most individuals selling their home would ensure that heat, electric and water service is on, foreclosed properties for sale sometimes don’t have such luxuries. That means bring a flashlight even if you are viewing an REO foreclosure during daylight hours. Remember, the basement may be pitch black. It also means dress warmly in cold weather – the inside of the REO foreclosure may be cold or even colder than outside temperatures. And there may be no water service – public water may have been turned off in the street and well water pump won’t function without electricity.
Purchase contract documents
Assuming you find a bank owned home, view it with a real estate agent, and decide you’d like to buy it, the next step is for your agent to write up the necessary purchase contract documents for you to sign and submit.
Make sure you and your agent are clear on what’s needed. Often banks have custom documents with language heavily slanted in their favor. Examples of this are things like:
- Buyer, at buyer expense, must order any municipal inspections and obtain any municipal permits required by the municipality.
- Seller is not required to have utilities on for buyer inspections and appraisals.
- Seller will consider cash offers only.
- Buyer must use seller determined closing agent.
- Unique stipulations for how escrow (deposit) checks are handled. Etc, etc, etc.
Here’s an important document used with individual home sales NOT used with bank owned homes for sale: a property disclosure statement. Most states require individuals to disclose any known defects with a property by completing and signing a property disclosure statement. Buyers are given this document before submitting an offer to purchase. It provides an opportunity to ask questions and factor disclosure defects into an offer. But sellers who acquire a property via the foreclosure process are exempt from having to complete this form. That means buyers of foreclosed properties roll the dice a bit more than buyers of non- foreclosure properties.
Tips to get your offer accepted.
Just like any seller of real estate, the asset manager will want to get the best terms and highest price on his employer’s bank owned homes. But as noted earlier in this article, the asset manager also needs to take the necessary steps to ensure a high likelihood of an accepted offer actually closing – turning “bricks and mortar” into liquid cash. Put another way, accepted offers that don’t end up closing are like base runners stranded on 1st, 2nd or 3rd base. You can’t win baseball games unless those runners eventually score a run or runs by crossing home plate – the baseball equivalent of “closing”.
So how can you get your offer accepted? How best to structure your offer so that the asset manager gets that “high likelihood of closing” feeling? Offering the full asking price is certainly one way. Even better, make a full price offer with no mortgage contingency – all cash. And include a current copy of a bank statement in your name showing you have the necessary funds. You could also waive all inspection contingencies – buy the property literally “as is”. Put a large deposit down – say 25% of the purchase price. Here’s a way to make an impact on the asset manager – add in your offer that you’ll put down a 100% deposit. Example: price is $160k and your deposit is $160k. And of course, time can be your ally – build into your offer a quick 15 or 20 day closing. Bottom line: REO properties listed for sale will sell – it’s just a matter of “to who” and “when”. Follow these tips and you’ll increase your chances of being the “who”.
- Banks acquire title to properties via the foreclosure process and then put those properties on the market to be sold as quickly as possible.
- Be aware of the various industry terminology.
- If you are interested in buying a foreclosure, search online at auction sites and at the consumer sites such as Realtor.com, Zillow.com, etc. But also arrange to have a real estate agent work on your behalf. Even if you find a home to buy on your own, you’ll still need an agent to submit the offer to the bank.
- Bank owned homes can be rough – dirty, cluttered, sometimes structurally unsafe, lack of water, electric and heat service.
- Understand that in your offer you may need to use documents and make concessions not typical in sales of non-foreclosure properties.
- Make your offer to purchase stand out, get accepted and get closed by incorporating techniques like waiving mortgage contingencies, waiving inspection contingencies, putting down a large deposit, and offering to close in a short time frame.
The author, Rick Sheppard, is a licensed real estate broker in Collegville PA and a 30 year veteran of the real estate trenches. He knows a lot because he’s seen a lot. If you have any questions about this or any real estate related topic, feel free to contact Rick at [email protected] and he’ll do his best to answer your questions.