Buying Foreclosed Homes from a Bank
Bank foreclosures, also known as REOs, are attractive to both investors and homeowners. These properties are often sold at a discount and can save a buyer thousands in initial costs. Additionally, bank foreclosure properties can be very profitable when it comes time to refinance or to sell. Since these cheap homes were purchased below market value, the return on the investment can be much higher than with a traditional purchase. This is why foreclosure investment has drawn a lot of attention in recent years.
How to Buy a Foreclosure from a Bank
Buying a bank foreclosure that is for sale is not a complicated process. All bank owned properties have gone through the auction process. They come with a clear title and are free from all past liens. Bank foreclosure listings are handled by licensed real estate agents and all offers must be submitted to the bank by the agent.
Making an offer on a house from a bank is very similar to other standard listings. There are some basic steps, however, that a buyer needs to follow.
Step 1: Submit an Offer
All offers must be in written form. Your real estate agent, or the listing agent for the bank, will prepare the offer and submit it for you. Along with this contract, you should include a Proof of Funds. This shows that you have the means to pay for the property. If it is a cash offer, your bank will prepare a letter for you stating that you have the funds available. If you are getting a loan, then your lender’s pre-approval notice will work just fine.
The Counter Offer. Do not be surprised if the bank counters your offer at a higher price. This is part of the negotiation process. Whether you decide to accept their offer or counter again, your real estate agent will help you through the process.
Step 2: Pay the Earnest Money Deposit
If the offer is accepted by the bank, then you will need to put down an earnest money deposit. The amount of the deposit will have been stated in the purchase offer. Typically earnest money deposits are between $500 and $1,000. In very active markets they can total 2% – 3% of the purchase price. This deposit is applied to the purchase price at closing and is part of your down payment.
Step 3: Complete Your Due Diligence
The due diligence period is the time between the acceptance of the offer and the scheduled date of closing. This gives the seller and buyer enough time to prepare for the closing. A buyer’s due diligence should include the following items:
Home Inspection. This is a very important part of the due diligence when buying a foreclosure property. The bank has never lived in the property. Federal guidelines release them from the typical disclosure statements that homeowners must include with their listing agreement. All bank owned properties are sold “As Is.” It is up to the buyer to make sure that they know the true condition of the property.
If there are serious problems with the home, you can try to negotiate a lower price or walk away from the purchase (with your earnest money deposit) as long as a satisfactory home inspection contingency was made part of your offer. (See also Bank Owned Home Inspection).
Title Insurance. Even though the home comes with a clear title, buyers should obtain title insurance on the property. In the event that something was missed during past property transfers, title insurance is a way to protect your investment.
Mortgage. The due diligence period also allows buyers to finalize their loan and gives time for the banker to order the real estate appraisal.
Homeowner Insurance. During this time period, buyers need to make arrangements for property insurance. The insurance company will submit the invoice to the title company and it will be paid as part of the closing costs.
Step 4: The Closing
Assuming that the home inspection and the appraisal were acceptable; the title search comes back clear; and you are approved for your loan; the real estate agent will schedule the closing. At the closing, you will sign all the paperwork that has been prepared by a lawyer. You receive a warranty deed and the property becomes yours.
Bank owned homes can create fabulous real estate investment deals. Though the process can seem daunting, an experienced real estate agent can easily lead you through the process. If you make sure to do your due diligence, you can rest assured that you have made a good investment decision.