September 11, 2019 by
During an online search of “Homes for Sale,” there is an elusive category that receives much attention and even greater speculation. This type of listing typically may even be considered a Potential Listing rather than a sure thing. Of course, we are talking about Foreclosed Homes.
In a previous post, we explained how homes are auctioned to the public as they move through the foreclosure process. If the home does not sell at auction, it becomes a bank-owned property – also referred to as Real Estate Owned (REO) property. REO properties can then be listed and sold through the MLS much like traditional real estate.
If you are considering one of these homes, there are five key things to know about buying a foreclosed home and how the process differs from standard home-buying.
The Process of Buying a Foreclosed Home is Unique in These Five Ways:
1. Financing May Be Harder to Attain
Some REO properties are in worse condition than others. It is not uncommon for a home’s previous owners to be evicted and experiencing financial hardship at the time of the bank’s repossession. If you have seen a home repair show where the property was full of tattered junk, broken appliances and foul odors, now you know why!
While it is possible to mortgage an REO property, it may be more difficult to find financing if the home is in poor condition.
A distressed home may not qualify for a low-down conventional mortgage, or an FHA or VA loan. Cash buyers are typically a good fit for severely run-down homes because they are not bound by financing requirements. However, some banks offer a specific type of renovation mortgage to combine purchase price and repair expenses into one loan.
2. Negotiations Could Take Longer
When you submit an offer on an REO property, you aren’t submitting an offer to the couple across town. You are submitting an offer to a bank! As you might imagine, this can be a tedious and time-consuming process. Whereas a normal seller may respond to an offer on the same day, a bank could take 10 days or more to respond.
Banks will typically ignore offers on an REO property that have not been pre-qualified by a lender for financing (which can be harder to come by, as we explained above). Learn more about steps to take before you start house hunting.
3. Inspections Are VERY Important
Foreclosed homes are typically sold “as-is,” meaning the seller will make no repairs. If there is a period for any type of inspections to take place, it will be brief. Two things come of this:
- Order inspections as soon as possible. If you wait too long, you could miss the inspection timeframe altogether.
- Your bargaining power over repairs are almost nonexistent. That may be hard to hear if the home’s inspection results are less than ideal. You can either move forward and buy the home or ask for a release within the given time period.
Unlike a traditional MLS listing, REO properties have no Seller’s Disclosure. Even if the bank should know of a problem, it is up to the buyer to do their due diligence on the purchase. Whether it be a problem with the home’s condition, zoning, flooding, nearby construction or road work – these are all up to the buyer.
4. Fine Print in the Contract
A standard real estate contract includes lending terms, closing terms, condition and inclusions and inspections (and much more).
The contract to purchase is foreclosure is unique, because it has to comply with state and local laws, but uses the bank’s national contract as an addendum. Where the contracts conflict, the bank’s addendum generally takes precedence. Buyers and their agent should read the terms of this addendum VERY carefully to identify changes!
FHA and VA-owned foreclosures are one notable exception. Because these homes are sold by the federal government, their contract is a standard national contract, and very different from what agents use in a typical MLS transaction. For all of the above reasons, it is essential to find an agent with experience buying REO properties to guide you through the process of buying a foreclosed home.
5. Closing Considerations
Using a reputable title company is a must. The deed of conveyance, a legal document showing the transfer of a home’s title, is usually a special warranty deed or a quit claim deed in a foreclosed home transaction. In other words, the deed may not show all of the claims against the property or defects to the title before or after the bank’s ownership.
You will want to have a full picture of what lies ahead with your foreclosed home, especially if that means clearing up liens on the property. If you need help selecting a reputable title company, ask your agent for recommendations.
Foreclosed Homes and Housing Market Conditions
In a Seller’s Market, buyers are more willing to purchase a problem and purchase it high. Some foreclosures are priced to sell, while others may be priced a bit higher because of the bank’s desire to recoup losses. At the end of the day, price will be greatly influenced by a buyer’s ability to see the home’s potential despite its checkered past.
There are many available listings for foreclosed homes, and all sorts of different contractors, websites, contracts and addendums to choose from. If you are unsure who to call about a foreclosed home, it is best to pick an agent who has purchased an REO property themselves or has assisted several other recent buyers in the process. An agent with experience, diligence, and the willingness to jump through a few extra hoops will be your best helper!
Meyer Real Estate Has the Home Buying Experience You Need
A foreclosed home typically has a lower price tag – but, buying one of these properties without an experienced real estate agent can cost you time, money and a lot of heartache. There are some very real challenges to buying an REO property. Whether you are an investor or a handy home buyer looking for a new project, Meyer Real Estate can help you come out on top.
Many of the agents at Meyer Real Estate have experience buying homes as they move through the foreclosure process, including homes offered at public auction, online auction and MLS listings. We have the experience to help our clients find a good deal or walk away from a potential money pit.
Buying a home of any type is a major financial decision and should not be based solely on the contents of this article. Please consult a real estate, financial professional and/or legal counsel regarding the foreclosure process in your state of residence before you consider participating in this type of transaction.