If you are considering purchasing a bank-owned foreclosed property, then you these 15 facts will give help inform you about what to expect.
What is a Bank Owned Foreclosed Property?
A bank forecloses on a property when the person paying the mortgage stops making payments. When someone takes out a loan on the house, the house becomes collateral in the event they don’t pay the mortgage. If payments become seriously delinquent, the bank steps in and terminates the equitable right of redemption. At this point, the bank takes back the house to sell it. In this way, they recoup some or all of the money owed.
Don’t Expect Rock Bottom Prices
People sometimes have the idea that a foreclosed property is going to sell for a rock bottom price. They may think because it’s a bank owned property and the house is empty, the bank is desperate to collect its lost money right away. However, in many instances, a bank-owned foreclosed property will sell AT or OVER the asking price. How does this occur?
A bank may start by listing a foreclosed property for substantially under its value. This generates high interest and a steady stream of people coming in with multiple offers. Just as with an auction individuals will try to outbid each other, which can drive up the selling price. This can lead to the house possibly selling for more than market value. The excitement and emotions of multiple offers move people to keep pushing the offer higher.
When multiple offers occur on a property, the bank asks all buyers with proposals on the property to bring their highest and best offer to the table. The person with the best offer gets the home. The low starting price also helps guarantee the house will sell in a relatively short time.
Banks Won’t Cut Their Profits in Half
While it would be nice if banks were willing to take 50% of their asking price right away, this is unreasonable. Trying to offer half the asking price is a quick way to get rejected because it indicates the person asking is not a serious bidder. The way banks usually operate with foreclosures is to accept offers within 5%-10% of the asking price within the first 30 days on the market. That’s a good ways off from a 50% reduction. The banks will reduce the cost every 30 days usually until the house sells.
Banks Do One of Three Things With an Offer
Once a bank receives an offer, they will move to do one of three things. If the proposal does not appear serious, they will REJECT it. If they are trying to sell the house right away and the offer is reasonable, then they will ACCEPT your offer, or they may COUNTER your offer. Keep in mind that while these negotiations are happening, the bank will be looking at all other offers that come in, and they can accept any other offers.
Banks Consider Your Loan Type
When the bank begins looking at your offer, as well as any other offers, they consider how you will pay for the property. Of course, cash is always best. If you have a cash offer, you may be able to negotiate a much better price than someone who is borrowing the money. However, since not too many people may have the cash to spend on buying a house outright, the bank looks at the type of financing you plan to secure. There are three types:
- Conventional— A government entity does not provide insurance for conventional loans. It usually includes a fixed rate of interest and terms.
- FHA— An FHA loan is insured by the Federal Housing Administration, which is a government entity. It is offered to individuals who are in the lower-to-moderate-income bracket. FHA loans do not come directly from the Federal Housing Administration but through a third party lender who is approved to administer the loans. With an FHA loan, you only have to pay 3.5% down on the house.
- VA—This type of loan is offered to American veterans, current military members, and some surviving spouses (if they don’t remarry). The United States Department of Veteran Affairs financially guarantees this loan. This type of loan may allow eligible participants to get a house with no down payment.
Banks May Take Into Account How Much Money You Put Down
The amount of money you have to put down on a property may be relevant to the bank. If you’re getting an FHA or VA loan, then the amount of the down payment is lower than conventional loans.
Banks Prefer No Contingencies
Banks look for the cleanest offer with the LEAST amount of contingencies. A contingency is a condition that, if it occurs, makes the real estate contract void. All real estate contracts have some contingencies. Some of the more common contingencies center around the mortgage terms, closing date, and insurance. However, there may be other contingencies not as commonplace. To make your bid stronger, you can forgo the offer contingent upon a successful inspection, and waive the contingency to get your mortgage obtained.
Banks Look for Earnest Money
When deciding if someone is a serious buyer, a bank looks for an offer with a large earnest money deposit.
Banks Want to Hear From You ASAP
If the bank counters a buyer’s offer, they will want a response back within 24 hours, or the deal is void. That means you will need to be ready to act.
Banks Won’t Do Repairs
Bank owned homes are sold AS-IS, WHERE-IS. You can obtain a home inspection if you want, but don’t expect them to take care of any repairs. What you see is what you get when it comes to foreclosed property.
Better Offers Get Faster Response Time
Once you submit an offer to the bank, you can expect to hear back from them anywhere between 2 days to 2 weeks. If you want to move the process along faster, give them a good offer, and they will respond quicker. However, if they take two weeks to get back to you, it's usually because the offer was too low.
No Disclosures On Foreclosures
With a regular home purchase, the seller usually provides the buyer with a disclosure form, which indicates what things are wrong with the house (if any). However, with bank-owned foreclosures, there are NO seller disclosures. The bank doesn’t have any information on the condition of the home or when any repairs have been performed. You can pay to have a private inspection done by an inspector of your choice if you choose
Banks Are Ready to Close Fast
Banks prefer to close on the property within 30 days of an accepted offer. So, be prepared to have everything in order in case your offer is accepted.
You Must Be Pre-Approved for a Loan
Banks will not even look at an offer without a current mortgage PRE-APPROVAL from a reputable lender. Many banks want you to be pre-approved through their lender or lender of choice as reassurance that you qualify for the loan.
Foreclosures May Have Mold
Many bank properties have MOLD issues because of the utilities being turned off for an extended time. If the weather gets frigid, a water pipe may burst and bring water into the house. Mold may form in the drywall if this happens. The bank WILL NOT remedy this issue. You can have the home inspected to determine if there are any issues. That way you’ll know what you’re getting in to.
Are you ready to look for your next home? At Mark Z Real Estate Experts, we can help you find an impressive house that fits your budget. Get in touch with us today for more information.
Photo on top right of page courtesy of NatalieMaynor
Photo next to point #7 courtesy of joguldi
Photo of loose coins courtesy of stopnlook