Over the past few weeks, I’ve written a number of blog posts on a variety of key issues that affect home buyers who are entertaining purchasing a bank owned (foreclosure) home.  Over the next couple of years I may very well feel compelled to add to the list, but for now, I’m electing to condense all of the 11 Things You Should Know About Buying [Bank Owned] Foreclosures into this one blog post, for easy referencing by any of you home buyers or aspiring Buyers’ Agents, so here ya go. By clicking on the heading to each item, you’ll be taken to the full blog post where you can find additional information, explanations and clarifications about each topic.

1. Terminology – The word Foreclosures is one of several terms used to describe foreclosed properties, and they all mean the same thing.  Foreclosures = REO = Bank Owned = Lender Owned. All of these terms refer to residential properties that are now owned by any of a variety of lenders or lending-related entities.

2. Price – Truth be told, there are no general pricing rules on how banks price any given Foreclosure.  Some of them are priced 10-15% below current market values, often resulting in multiple offers and mini-bidding wars among buyers.  That in turn often results in a sales price that’s higher than the asking price.  Other Foreclosures are priced at or even above current market values. The key to buying a Foreclosure at a good price is to research the most current comparable sales, accurately assess the property’s condition, and then structure the offer appropriately.

3. Multiple Offers – If a Foreclosure is in decent condition and is priced aggressively, the property will almost always attract multiple offers from multiple buyers in a very short time. When that happens, the bank’s asset manager will sometimes simply choose the offer/buyer that s/he likes the best, and the other offers will be rejected. However, sometimes the bank’s asset manager will issue an invitation for all buyers to submit their “Highest and Best” offer by a specified time (typically within 24 hours or less). Such ‘verbal’ negotiations are done via email between the listing/seller’s agent and the buyers’ agent, but with this technique each buyer is given the opportunity to modify the price, terms and/or conditions of their original offer. And of course, the bank’s objective is to secure the highest and best offer possible for the bank, not for you the buyer!

4. Response Time – There have been instances where certain banks have taken as long as 2-3 weeks to respond to an offer from a buyer on a Foreclosure. However, in my experience the average response time from banks is typically 2-3 business days. Of course the case load of the specific asset manager, the proficiency of the listing/seller’s agent, and numerous other factors can increase response times, which is why there is no predetermined or predictable response time by banks to offers for Foreclosures.

5. Condition – Foreclosures are always offered for sale in AS-IS condition. What that means in street language is, “What you see is what you get!” It also means “Buyer Beware!” The message the banks are trying to send is that they are not interested in doing any repairs on the property, regardless of the extent of any such needed repair(s).

6. Repairs - Most Buyer’s Agents out there are unaware that there have actually been cases where the bank did indeed agree to perform some specific repairs, in spite of their AS-IS stipulations. During a professional home inspection, occasionally a major problem is detected. Some examples would be an A/C unit that is inoperable, roofs that have serious problems or zero life expectancy, electrical issues that pose a health and safety hazard, plumbing problems that pose imminent water damage risks, etc. These types of property conditions are what some people call “deal breakers,” as they can often result in the buyer canceling the contract and walking away from the property. However, an experienced Buyer’s Agent can present a copy of the inspection report(s) to the listing/seller’s agent, along with a carefully worded repair/replacement request. The incentive for the seller to consider the repair is that they now know the condition exists, and they know that any subsequent buyer will encounter/discover the same problem. Often the bank/seller will actually agree to perform the repair(s).

7. Utilities – Most bank/sellers will agree to turn on water and electricity to the property in order for a professional home inspection to be conducted. However, some banks/sellers flat out refuse to turn on the utilities, especially natural gas. The primary issue here is that it’s impossible to check out a gas furnace, water heater, range/stove, fireplace or any other gas appliance when the gas not on.  And it’s impossible to check out or inspect plumbing and electrical systems and appliances when the electricity and water are not turned on.

8. Bank Addenda – It’s a common practice for banks/sellers to require the buyer to sign off on their counter offer and/or addenda PRIOR to the bank/seller signing the contract or addenda. Each bank and bank asset manager operates their own way, but the buyer should be aware that the bank will inevitably require their own documents to be executed by the buyer before the buyer is ‘awarded’ a contract for purchase of the property.

9. Investors vs. Owner-Occupants – Fannie Mae, Freddie Mac and a couple other banks have implemented what is commonly known as a FirstLook Policy. During the first 15 days of the listing (for Fannie & Freddie), the bank/seller will not accept, entertain or consider any offer that is not from an owner-occupant buyer.

10. Closing Costs – Many home buyers these days are utilizing FHA financing that requires only a 3.5% minimum down payment. But for many home buyers, especially first timer buyers, closing costs of 3-5% can be cash prohibitive. As a result of current market conditions, it’s become a fairly common practice for buyers to ask bank/sellers to make ‘concessions’ of 3-3.5% toward buyers’ closing costs and prepaids. Generally speaking, most bank/sellers are receptive to paying such closing costs, but not always. Once again, how receptive any given seller is to paying such concessions depends on the particular bank/seller, asset manager, pricing on the property, if multiple offers have been submitted, comparable sales in the area, and a number of other variables.

11. Appraisals – Perhaps the biggest ‘wild card’ of residential real estate these days is the infamous appraisal that is a requirement of any purchase utilizing a mortgage loan. Appraisers can no longer be influenced or manipulated by lenders or real estate agents, and in fact, appraisals are now done via third party appraisal management companies. That may very well reduce or eliminate undue influence by a lender or agent, but it also sets up the possibility of an inexperienced or crappy appraiser turning in a bad appraisal. Or an appraisal can be done by an appraiser that is not at all familiar with the particular area in which the appraised property is located.

Are there any other critical topics, issues, concerns or questions about buying bank owned foreclosures that I’ve overlooked or forgotten? If so, would you please leave a comment, call, text or email them to me?

In the first ten installments of this series (1st Thing You Should Know About Buying Foreclosures, 2nd Thing You Should Know About Buying Foreclosures, 3rd Thing You Should Know About Buying Foreclosures, 4th Thing You Should Know About Buying Foreclosures, 5th Thing You Should Know About Buying Foreclosures, 6th Thing You Should Know About Buying Foreclosures, 7th Thing You Should Know About Buying Foreclosures, 8th Thing You Should Know About Buying Foreclosures, 9th Thing You Should Know About Buying Foreclosures, 10th Thing You Should Know About Buying Foreclosures), I wrote about Terminology, Pricing, Multiple Offers, Response Time, Property Condition, Repairs, Utilities, Bank Addenda, Owner-Occupant vs. Investor Buyers, and Closing Costs – as they relate to “Things You Should Know About Buying a Foreclosure.”  Here’s the 11th post of the series:

• Appraisals – Perhaps the biggest ‘wild card’ of residential real estate these days is the infamous appraisal that is a requirement of any purchase utilizing a mortgage loan. Appraisers can no longer be influenced or manipulated by lenders or real estate agents, and in fact, appraisals are now done via third party appraisal management companies. That may very well reduce or eliminate undue influence by a lender or agent, but it also sets up the possibility of an inexperienced appraiser turning in a bad appraisal. Or an appraisal can be done by an appraiser that is not at all familiar with the particular area in which the appraised property is located.

The appraisal can ultimately make or break a transaction. What if the appraised comes in with a value that is substantially below the contracted price? Will the buyer be willing to ‘eat’ the difference? Will the bank/seller be willing to reduce the contracted purchase price to match the appraisal? Will the buyer and seller be willing to split the difference?

In transactions involving Foreclosures, there’s little or no direct negotiating with the bank/seller, so it’s vital that your Buyer’s Agent is experienced and knowledgeable in how to present the low appraisal to the listing/seller’s agent.

In the first nine installments of this series (1st Thing You Should Know About Buying Foreclosures, 2nd Thing You Should Know About Buying Foreclosures, 3rd Thing You Should Know About Buying Foreclosures, 4th Thing You Should Know About Buying Foreclosures, 5th Thing You Should Know About Buying Foreclosures, 6th Thing You Should Know About Buying Foreclosures, 7th Thing You Should Know About Buying Foreclosures, 8th Thing You Should Know About Buying Foreclosures, 9th Thing You Should Know About Buying Foreclosures), I wrote about Terminology, Pricing, Multiple Offers, Response Time, Property Condition, Repairs, Utilities, Bank Addenda and Owner-Occupant vs. Investor Buyers – as they relate to “Things You Should Know About Buying a Foreclosure.”  Here’s the 10th post of the series:

• Closing Costs – Many home buyers these days are utilizing FHA financing that requires only a 3.5% minimum down payment. But for many home buyers, especially first timer buyers, closing costs of 3-5% can be cash prohibitive. As a result of current market conditions, it’s become a fairly common practice for buyers to ask bank/sellers to make ‘concessions’ of 3-3.5% toward buyers’ closing costs and prepaids. Generally speaking, most bank/sellers are receptive to paying such closing costs, but not always. Once again, how receptive any given seller is to paying such concessions depends on the particular bank/seller, asset manager, pricing on the property, if multiple offers have been submitted, comparable sales in the area, and a number of other variables.

The strategy and structure of your offer is extremely critical when it comes to bank owned foreclosures. It needs to be competitive with other buyers, but it also needs to be within reasonable appraisal range, include terms and conditions that are favorable to your financial situation, cash flow, etc., and yet it has to be attractive enough to a bank/seller to invite them to accept your offer.  Best advice is to work closely with your Buyer’s Agent in drafting your offer. An experienced, knowledgeable and skilled Buyer’s Agent can be worth a pot of gold at this stage!