How to Buy a Bank-Owned House
If you've been shopping for homes online lately, you've probably come across the phrase bank-owned foreclosure home. What does this mean to you, as a home buyer? Does buying a bank-owned house offer any benefits? And if so, how do you go about purchasing such a home?
In this article, you will learn how to buy a bank-owed house in step-by-step fashion. We will talk about how to find these properties, how to evaluate them, how to get financing, and how to submit an offer.
What Is a Bank-Owned House, Exactly?
You probably have a basic understanding of the foreclosure process already. When a homeowner can stops making mortgage payments, the bank will eventually take the home away from them. That's the foreclosure process in a nutshell. But there are actually several key steps in the process. If you want to buy a bank-owned house, you need to understand the sequence of events leading up to the bank-owned status. So let's talk about the different stages of the foreclosure process.
The Stages of Foreclosure
When a home gets foreclosed upon, it usually goes the three stages below:
1. Pre-foreclosure: When homeowners fall behind on their mortgage payments, they will eventually receive a notice of legal action from the lender. This is the pre-foreclosure stage, when the bank has not yet foreclosed on the home. The bank will make a legal record of the default, which becomes public information. During this stage, the homeowner may be able to salvage their house. There are options available in which the homeowner can work with the lender to reinstate the mortgage, thus preventing the foreclosure process entirely. But more often than not, the home will eventually be foreclosed upon by the bank.
2. Auction: This is usually the next step after a bank forecloses on a house. This is an attempt to sell the home as quickly as possible, by putting it up for sale at auction. Bidders who have cash in hand can bid on the property, as long as their bid is above a certain starting point. If the home is sold at auction, that's the end of it. If it's not sold at auction, the home goes back on the market as a bank-owned house.
3. Bank-owned property: When you see a home listed on a website like Realtor.com with the label "bank-owned foreclosure," it means the house has probably already been through the auction process. Or maybe the bank skipped the auction altogether. Either way, the home has not been sold and is still available for purchase. This is referred to as a bank-owned house.
A home buyer can purchase a foreclosure property during any of the three stages mentioned above. But we are going to focus on the third stage, the bank-owned property, because that's where most first-time buyers focus their attention. Buying a bank-owned house is generally the safest bet for people who are new to the foreclosure-buying process. Purchasing a home in a pre-foreclosure or auction status is best left to the experienced buyers. So let's talk more about how to buy a bank-owned house.
How to Find Bank-Owned Homes
As we mentioned earlier, the entire foreclosure process is a matter of public record. As soon as the lender files a notice of legal action against a homeowner, it comes onto the "radar" of potential buyers. This kind of information is usually filed at the county government level. So you could get information about foreclosures and bank-owned homes by contacting your local tax assessor's office (or whichever department handles foreclosure records in your area). But there's a better way to go about it...
These days, there are several websites online that give you access to foreclosure listings and other relevant data. If you're serious about buying a bank-owned house, this is definitely the way to go. Think about it for a minute: Would you rather make a lot of trips and phone calls to one of your local county agencies, or log onto a website and view properties instantly? It's kind of a no-brainer, when you think about it. You can subscribe to one of these websites for a few dollars a week, and the cost is definitely worth it. We recommend using RealtyTrac.com, but there are other websites available as well.
You can also find bank-owned homes on Realtor.com. When I was writing this article, I was actually in the market for a new home in California. I went on Realtor.com frequently, and I saw quite a few bank-owned properties listed there. But you will probably get access to more property listings (and other helpful data) by using RealtyTrac.com. After all, it's what they specialize in.
How to Get Financing
Not all mortgage lenders are willing to finance for foreclosure properties. So you may need to shop around to find the right lender. This is why we recommend getting pre-approved for a loan, before you try to buy a bank-owned home. During the pre-approval process, you can tell the lender you are interested in buying a bank-owned property. If it's a problem for them, you will find out in advance. Getting pre-approved is a good idea for other reasons as well. It helps you find out how much a lender is willing to give you, based on your income, debts, credit score, etc.
It's also possible to get financing from the lender that owns the property. This doesn't work in every scenario, but it's worth considering. Sometimes, you can get better terms from the bank that owns the house than from another mortgage lender. Remember, they want to get the home off their books as soon as possible. So they have an incentive in you buying the property.
If you haven't done so already, be sure to establish a budget for yourself. This is a critical step for anyone planning to buy a bank-owned home in the future. Take a look at your monthly income and monthly expenses, and figure out how much you can realistically afford to pay toward a mortgage each month. Failing to set a budget is one of the most common reasons why people end up in foreclosure in the first. Here's an article that explains how to establish a basic budget for online purposes.
Find an Agent Who Knows How to Buy Bank-Owned Homes
This is one of the most important lessons to take away from this article. If you are a first-time buyer interested in buying bank-owned homes, you should find an agent to help you. In most cities, there is at least one real estate agent who specializes in buying foreclosures and bank-owned properties. And if they don't necessarily specialize in it, they are at least very familiar with the process. In cities with a higher rate of foreclosure (like practically all of California), there should be many real estate agents who are familiar with this process. Seek one of them.
An agent who is foreclosure-savvy can help you in many ways. He or she can help you evaluate the asking price, which is a critical step in the process. The agent will also help you put together an offer to send to the bank. This is mission-critical. If you make an offer that is too low or is not supported by sales data, you may have blown your chances of buying that house.
In a typical real estate transaction, it is usually the seller who pays for the agent's commission. Since there is no homeowner involved when buying a bank-owned home, that means the bank would have to pay for the agent's commission. Most banks are willing to do this, because they know it's necessary to sell the property. But from your perspective, as the home buyer, all you need to know is how your agent is going to be compensated. If they plan to seek their commission from the bank that owns the property, then it's the agent's responsibility to see if the lender is open to that.
When choosing an agent to help you buy a bank-owned home, ask if they have any experience with the process. It's important to be upfront about your goals and plans. Some agents might not want to work with foreclosure shoppers (for whatever reason), so tell them in advance. If you have a specific property in mind, let them know about it. You should also tell the agent that you've been pre-approved by a lender already. This will make them more willing to work with you. Some real estate agents refuse to work with buyers who haven't been pre-approved, because they could end up wasting their time on a client who can't get financing. I can't blame them.
Visit the Foreclosure Property to Evaluate It
It's common for bank-owned foreclosure houses to be in a state of disrepair. When homeowners have financial problems to the point they are unable to make their mortgage payments, they are not likely to perform necessary repairs or upkeep to the house. That's why it's so important to see the bank-owned foreclosure property for yourself. You can only tell so much from a photograph. A lot of bank-owned houses only have one or two photos of the exterior and interior. So they may not tell the whole story.
I recommend doing a walk-around before you schedule a tour of the inside. In some cases, you can rule out certain houses just by walking around the exterior. Here's a prime example from my own experiences:
I visited a house last week that was a bank-owned foreclosure. I found it on Realtor.com, and it seemed to have a lot of promise. The asking price was lower than market value, which is fairly common with bank-owned properties. And I liked to location of the home. So my wife and I mapped the address and drove out to see the place.
This house was straight out of a horror movie.
Some bank-owned properties are in decent shape, while others are in terrible condition. This one was definitely on the latter end of the scale. We peeked inside a window and saw that the ceiling was falling down in several places. It looked like a flock of birds was nesting inside the hollowed-out cavity of the ceiling. The floor had been chipped up in several places -- probably the work of a disgruntled homeowner. There was evidence of mold in several places throughout the house. The yard was a jungle, and I was afraid to let my daughter walk anywhere near it.
Now, for the right buyer, this might've been the perfect property. If someone were willing to bring in a contractor and invest $100,000 or more, they could have turned this home into a jewel. It was a Mediterranean-style villa on a decent lot, and it had some nice Italian cypress trees around the perimeter. So it definitely had potential. But it was well beyond our comfort zone. We were hoping to buy a bank-owned foreclosure home that only needed minimal work. In other words, we wanted a house that was livable from day one. This clearly was not the property for us, and it illustrates the importance of viewing the property firsthand. If we had contacted the bank or the listing agent about touring the inside, we would've wasted everyone's time.
There's another good reason to visit the house, and it's going to tie into the next part of this article. When you visit a bank-owned foreclosure, you can usually find some information posted in the window. Some of it might just be a record of the legal filing. But you may also find some information about the bank that owns the property, or the listing agent they have hired. Write down any contact information you find on the window of the house. It will be useful later.
Contact the Bank That Owns the Foreclosure
So, you've been pre-approved for a mortgage loan, you found a bank-owned foreclosure home you like, and you've got yourself an agent to help with the process. The next step (in most cases) is to contact the bank that owns the house. Ask for their REO department or their asset-management department. These are the folks who handle the foreclosed homes. Tell them you are seriously interested in the property and you wish to view the inside of it. They might have a local listing agent who can give you access to the house. In fact, you may have noticed a lockbox on the door when you first visited the property. This is the only way to take your assessment to the next level, by seeing the inside of the house.
Submit Your Offer to the Bank
In order to buy a bank-owned foreclosure home, you need to submit a reasonable offer. This is another area where your real estate agent's help will prove invaluable. You can submit an offer for the price the bank is asking, or you can make an offer below the list price. The most important thing is to base your offer on recent sales in the area. If you do this, and if you can support your offer with recent sales data, there's a better chance the bank will accept your offer.
When you buy a bank-owned foreclosure property, you can usually make the sale contingent upon a home inspection. This is the same thing you would do in a normal real estate transaction. This kind of contingency gives you a way to back out of the deal if the inspection uncovers items you are unwilling to accept. For example, if the roof looked like it was in decent shape to you, but a home inspector finds major damage that warrants a complete replacement, you would probably want a way out of the contract. That's what a contingency is for.
This is another advantage of buying a bank-owned foreclosure home. If you buy a home through an auction, you won't have the opportunity to inspect it. But when you buy a bank-owned home, there's a good chance you will be able to inspect the property.
When submitting your offer, be sure to consider the cost of any repairs you'll be making. Bank-owned foreclosures are frequently listed for less than their current market value. But this doesn't always account for the costs needed to repair them. If the house is priced low and is in very good condition, then you can offer closer to the asking price.
Sometimes, the bank will set the price low to account for the amount of repairs that are needed. But you won't know this until you determine the current value of the home. You can get a rough idea of the property value by looking at recent sales in the area. Based on this research, you can make a reasonable offer to buy the bank-owned foreclosure.
Conclusion and Going Forward
As long as it is, this article is incomplete. If you are serious about buying a foreclosure property, you need to research the foreclosure process and laws in your state. That's a good start, but you need to do more. You should also talk to a real estate agent who is familiar with the process. We also recommend that you read at least two more articles that explain how to buy a bank-owned house (preferably articles from a reputable source, such as the Wall Street Journal). Good luck!