Should you buy a home that is now owned by the bank, viz., a foreclosed home? And if so, who will finance it?
Homes that the banks now own through a legal foreclosure process are called REO’s, short for “real estate owned”. Even though in some parts of the country people think real estate has bottomed out with regards to the number of foreclosures pending, there are still hundreds of thousands of homes that sit vacant because they have not sold, either by auction or traditional listing.
You could buy an “underwater” or pre-foreclosure home via a “short sale” offer to the lender. A short sale is when the lender agrees to sell the home for less than what is owed to the mortgage lender. This process could take up to six months or more to go full cycle. Can you wait that long?
There are many caveats the potential buyer needs to be aware of before making a short sale offer. It is not my purpose to articulate all these caveats in this article. Call us for more information.
Or you could buy a REO on the courthouse steps if you are willing to pay what the bank is asking, which in most cases, is the total payoff. Most likely the amount the bank is asking is unreasonable as all the legal fees, penalties, and accrued interest of the foreclosure process are in the bank’s asking price. Only about 5% or less of these homes are actually bought at the courthouse steps.
If the home is not sold at the courthouse, it becomes REO property. The lender will either turn the property over to a local Real Estate firm or package them together with other foreclosed properties across the country and have an auction firm auction the property via the internet, a live onsite auction, or a combination of both.
Banks are increasingly selling foreclosed properties at auctions to reduce the growing inventory of REO properties. The property is sold “as is, where is, no warranties implied.”
If the property doesn’t sell by listing it with a Realtor or through an auction, you could negotiate an offer directly with the lenders. I think this is a good way to buy these distressed properties. This is how many investors do it. But regardless of how you buy it, you must have financing in place if you are not a cash buyer.
With an auction, financing should be in place before the auction as you will have only 30 days to close after the auction. If you are unable to close in that time period, you could lose your deposit. You do not want to go get financing after the auction as that could take up to sixty days.
If the Realtor cannot sell the property during the listing period, and if the home does not sell at auction, then the bank becomes very “motivated” to get these non-incoming properties off their books or convert them to income producing. How do they become income producing assets?
Assuming you have good credit (and that might mean a credit score of 800 or above) the bank might do the financing for you. This can save you a lot of expense as the bank probably has already inspected the property, had an appraisal done, and the title searched. You can negotiate not only the interest rate, but also the amount of down payment. Just don’t expect 100% financing. A 10% down is probably reasonable as you will be spending money fixing up the property and this expense becomes part of your negotiations with the lender.
Should you buy a bank owned (REO) home? Hey, if the opportunity avails itself and you have the cash or credit score, go for it!