Sacramento Real Estate Views

Buying A Foreclosure? Know What To Expect

Buying a foreclosure is much like buying a regular owner occupied property in that it’s between you and the bank (seller).  You won’t wait months, like a short sale, for a bank approval before you can close on your new home or investment property but you will be asked to jump through some hoops that are unique to bank owned foreclosed homes (aka REO’s = real estate owned).

Being prepared for those hoops could save you a lot of time, stress and could mean the difference between successfully closing on a very good deal or losing it to another buyer.

Financing Your Purchase

If you’re paying cash for the property you’re offering on, you’ll need to supply your agent with a bank statement showing that you have the “cash to close” ready and available in addition to a deposit check.  The bank will want to see that you have the means to close escrow before accepting your offer and in many cases, your offer will not be submitted to the bank without it.

If you’re financing your purchase, you may be asked to get prequalified with the bank who owns the property you’re making an offer on.  You could run into this repeatedly and while you have a grace period with regard to the number inquiries on your credit report this could reduce your credit score if it happens too much.

This makes getting the offering price correct crucial to maintaining your buying power and a good credit score.

A note on financing an REO:  Government backed loans, other than a FHA 203K, and some conventional lenders might require items considered to be a safety risk be repaired prior to funding the loan.  The banks state straight away that all their homes are sold in “as is, where is” with no repairs made by the seller.

You’ll need to confirm this with your lender prior to making an offer on an REO that is needing a great deal of repair.

Negotiating With The Bank

Since the foreclosure crisis began in 2007, a term came into the market that is about as annoying as it can be for any buyer looking to acquire a foreclosure.  That term is “highest and best”.

When submitting an offer on a bank owned foreclosed home, there is virtually no negotiation.  The bank wants what it wants and if there are multiple offers, they will select the top one or two offers, ask each buyer for their highest and best offer and the remaining offers will not be responded to other than a curt email from the agent saying “better luck next time”.

It’s up to your agent to let you know where the market is and what this property, based on condition and location, should sell for in the current market.  After that, it’s up to the buyer to decide if the property is worth their time and money to pursue.

If the price your agent suggests doesn’t sound like the price you envisioned offering, it’s best not to waste your time making an offer especially if the property looks like it could draw multiple offers.

Submitting your highest and best offer doesn’t always mean that you’ll have to up your price but could mean the terms of the offer you submitted need to be improved.

The bank often will have their own addendum to the California Residential Purchase Agreement that will supersede many clauses in your original agreement.  Make sure you understand the banks addendum as not clarifying that could cost you the house and your deposit.

Property Disclosure

By law, the banks don’t have to disclose anything to the buyer regarding the home they own and it’s up to the buyer to do all their own discovery regarding the condition of the property of interest at buyer cost.

All disclosures received from the seller will be labeled, “Bank has no knowledge of the condition of this property.  Buyer assumes all risks” or something of that nature.   This makes getting a home inspection and pest inspection at a minimum imperative to the buyers discovery.

As of this posting, a good home inspection could cost upwards of $500 depending on the size of the home and most pest inspections can be had for around $125.  Both will supply you everything you need to know about the condition of the home.

You will want to consider additional inspections depending on whether or not there is a pool or if there is any condition in or around the home that could look suspect or potentially cost much more to repair than you anticipated.

Inspection and Financing Timeframes

Generally, the bank will want to shorten your inspection time frames.  They generally want all contingencies of sale released as soon as possible.  It is not unusual for the bank to reduce your time to inspect from the agreement default of 17 days to 10 days.  This means you and your agent will need to act fast to get all inspections and discovery done in time to release inspection contingencies on the bank’s schedule.

You will need a phenomenal reason to get an extension of the inspection time frames.  If you do manage to get an extension out of the bank, generally it will be a 7 day maximum.

It’s typical for the banks to agreeable with the time it takes to get a mortgage approved and funded.  However, more than one delay to the close of escrow due to the mortgage process will be problematic.

The way to get around this is to extend only once but make sure you give yourself more time than you need to get the mortgage process completed.  Getting one extension granted isn’t that much of a challenge but getting two extensions has a very low percentage of success and you could lose the deal altogether.

Transaction Costs

Banks, so far as I have experienced, are reasonable when it comes to the allocation of title insurance, escrow fees and other transaction costs.

It never hurts to ask the bank to pay all costs as long as the offering price reflects list price or better.  Coming in low and asking for the bank to pay all costs of sale won’t have much of a chance of getting accepted unless the market is flooded with properties and sales are slow. (aka an overpriced market)  This was the case in the 2008/2009 real estate market.   There were an excess of homes on the market and it drove values low very quickly.

Summary

All banks are different in the selling procedures but buying a bank owned foreclosed home can be done easily with a little know how.  The key is to know the market and be reasonable taking the market into consideration.

If you don’t sell real estate for a living, you don’t know enough about it to know the market.  If you’re getting your information from the media, you are likely misinformed, like it or not.

Whether you chose me or another professional to work with isn’t a concern just find someone you trust and pick their brains to find out the information you need to know.  You’ll be able to tell by feel if they know what they’re talking about or if they don’t.

Have questions particular to your situation or a general question about purchasing an REO property?  Please call, text, email or simply fill out the form below and I’ll get back to you promptly.

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