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How to Buy a Bank-Owned Foreclosure Home - Part 3 of 3

By Brandon Cornett
© 2011 All rights reserved

This is part three of a three-part tutorial on buying a bank-owned foreclosure home. If you missed parts one and two, you can click here to start at the beginning.

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!

Part 1 | Part 2 | Part 3