Purchasing a Foreclosure

Posted by Matthew Lahti on Sunday, March 3rd, 2013 at 9:16pm

Purchasing a Foreclosure.  Good Idea?

Every buyer is always looking for a great deal but buying a foreclosure may not be the best option for everyone.  Before beginning your search for that next bank owned property here are some important items to keep in mind.

  1. Price – one of the biggest misconceptions about foreclosures is they’re priced well below market value; this is not always the case.  Prior to a bank listing a foreclosure they’ll obtain as many as 4 independent values on a single property.  Typically they will order 2-3 values from different Real Estate Agents and a full appraisal.  After the values have been submitted a list price is determined based on these values, amount owed on the defaulted note, repairs needed and average marketing time in a given area.
  2. Condition – In today’s market more and more banks are selling foreclosures in as-is condition.  Why?  Most properties were over under when the foreclosure sale took place and the bank is already taking a huge hit, repairing a property will further reduce their loss.  Initially they may attempt to sale the asset as-is, after a pre-determined amount of time they may review their marketing plan and either reduce the property for a quick sale or consider repairs.
  3. Financing – given that most banks are attempting to sell their assets in as-is condition financing a bank owned property with a VA, FHA or USDA loan may be difficult.  All three of these loans have minimum requirements in order to finance a home.  Many lenders will have the appraiser look at the roof, siding, floor coverings, appliances and heat source just to name a few.  If these items are not in good condition your loan will likely fall through during due to the appraisal.  Check with your lender on the minimum requirements for the type of loan you’re using.
  4. Inspections – most banks will allow the buyer an inspection period, typically 10 days.  During this time it’s up to the buyer to order an inspection of the property to determine the condition.  Even though the bank is allowing an inspection period doesn’t mean they’ll repair any issues that arise, inspections on bank owned properties are typically performed so the buyer can be informed before finalizing their purchase.  If the inspector notes repairs on the inspection report you can submit a request asking the seller to repair or even reduce the sales price but keep in mind most of the requests are denied.
  5. Earnest Money – on a typical bank owned property the seller would request at least 1% of the sales price as earnest money and 10% on cash sales.  Earnest money is a good faith deposit showing how serious a buyer is when making their offer.  If the buyer should default on the contract for reasons other then negotiated in the contract the seller would retain the earnest money as a penalty.  If you successfully close the transaction the earnest money is credited towards the sales price.
  6. Title/Escrow – in nearly all cases the bank will select the title and escrow company.  In the event that the buyer selects to use their own title/escrow company most banks will require the buyer to cover all closing fees.
  7. Bank Addendums – once an offer is submitted and accepted additional bank addendums will be added to the contract.  These addendums are meant to protect the bank, plain and simple.  The bank has never lived in the property and typically has no reports pertaining to the property and they will convey this throughout the addendum.  Make sure you review these documents thoroughly and as always you should consult and attorney if you have any additional questions.  Banks will typically not allow any alterations to their addendums, sign them as-is or there’s no deal.
  8. Cash Deals – cash can speak volumes when it comes to bank owned properties.  If you’re a cash buyer be prepared to provide a letter from your bank or a recent bank statement showing you have the funds available.

Even though buying a bank owned property may not be for everyone there are some deals to be had.  Before beginning your search be prepared.  Contact a lender and get pre-approved, ask your lender about the type of loan your approved for and what the appraiser will be looking for, find an agent that has access to and sells bank owned properties, be prepared to spend money on an inspection knowing that the bank will not repair and make sure to review all the documents pertaining to the sell.  Pacific Northwest Realty Group not only has several qualified and experienced agents in selling bank owned properties and we also have numerous bank owned listings.  Call one of our experienced agents today to get started.

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