So you wanna buy a foreclosure, huh? Let’s go through the process of how a home becomes a bank-owned property and then we’ll go over tactics.
First, if a homeowner decides to try and short sell a house it’s placed on the market, subject to 3rd party approval. If that home doesn’t sell as a short sale, the bank will auction the house on the courthouse steps at a Foreclosure Auction. The bank opens up the bid at whatever is owned on the loan (depending on who the foreclosing bank is, either 1st or 2nd lien holder, etc.) A trustee announces opening bids, and if no 3rd party person buys the property (say you or me also bidding at above the banks opening offer), the bank buys it for their opening/initial bid. It is now a bank-owned property (commonly mistaken as a foreclosure). It’s also referred to as “real estate owned” or REO property. It’s then assigned to a Realtor who handles bank-owned properties to place on the market at fair market value.
When the bank and the real estate agent representing that bank determine the market price, they’ve done extensive research into the market and where the pricing is. They then take that number and adjust it based on a few factors: if repairs need to be done and the bank doesn’t want to pay for them, they may get an estimate and slash the price accordingly. Another tactic would be a “fast sale” or a sale that’s 2-3 times faster than a normal property – they adjust the price accordingly, usually about 10-15% below market value for the property. So while the bank may be across the country from the actual house, they have many, many, MANY points of reference for the market and the value.
So now let’s talk tactics for making an offer:
1. The bank is not an emotional seller. They won’t be “offended” like other sellers if the offer is “too low.” However, with that in mind, making a realistic offer is more likely to get you a better deal. You’ll know when a property is priced well or even below market, and so will everyone else. Realize you won’t be the only one interested so you’re going to have to make your offer more attractive than others.
2. If you offer a low price, expect the bank to counter. (I had a client who offered $50k below list price, and the bank countered only $2k below list.) Keep in mind their negotiations are completely driven by their bottom line. Their counter will be based on that, not by your offer.
3. Bank owned properties are sold “as-is.” You can write in a period for a home inspection (and I always recommend buyers get one.) I would recommend you do it with the right to void (give yourself an out, but still get the information you need.)
4. Banks have an addendum usually about 16-20 pages of total legal mumbo jumbo about how the bank makes no representations about the condition of the property, you assume risk, etc. etc. It’s their protection – just in case. It’s important to have someone else read this addendum (a Realtor, an attorney, etc.) who knows what to look for….for example, is their a “per diem” fee if the deal closes late? is there a stipulation the buyer pays both the recordation AND transfer tax? These are questions you may not know you need to ask, but to us, it’s stuff that jumps out as a negotiable item. Also, keep in mind some of the things those addendums describe are not legally enforceable in some of our states. They’re general documents sent to anywhere they have assets.
Have more questions about the process? I’m happy to answer any questions….703.283.6120 or Contact Me.