A bank-owned REO home is one the bank had to take possession of due to mortgage default and that they couldn’t sell at auction. The bank now owns it and wants nothing more than to sell it. This could put you in a good position as a buyer. It also puts you in a risky position if you are not careful, though.
Before you jump at the chance to buy a bank-owned home, learn the steps you should take.
Do Your Research
It’s so easy to get excited when you hear a home in a neighborhood you’ve always wanted to live is being sold for a low price. But, before you jump the gun, do your research. Find out the condition of the home and the reason it’s being sold.
A home that is priced so low that it sounds too good to be true, could be just that. The damage inside the home could be so insane that the bank just wants it off its hands. Remember, the bank is going to sell the home as-is; they will not make any changes. They don’t care about holes in the wall, missing electrical components, or damaged flooring. All they care about is getting the home off their books.
Find out as much as you can about the home from neighbors and friends before jumping in head first.
Make a Contingent Bid
If you decide you are going to bid on the home, you will have to do so with a licensed real estate agent. You cannot make an individual bid on your own. Before you make that bid, though, make sure you add one, if not two contingencies to it:
- Inspection contingency – This gives you the right to back out of the contract should the inspector find major things wrong with the home. This is especially important with REO homes because chances are there are things wrong; it’s just a matter of how bad the damage is and what you want to accept.
- Appraisal contingency – Getting financing for a bank-owned home can be difficult if there is extensive damage. When things are wrong with the home, the value falls. This makes it harder to secure financing. Even if you bid less than the home is worth, if it’s in poor condition, no bank will accept it as collateral. Having the appraisal contingency allows you to back out of the contract without financial consequences.
This could be the hardest part of bidding on a REO home. Unlike bidding with the actual homeowner, you could wait weeks to hear back from the bank. They have a lot they have to consider. Depending on the reason for the foreclosure and the status of the loan at the time of your bid, the bank may have to obtain multiple signatures before they can accept a bid. Don’t assume your bid was declined just because you don’t hear something back in 24 hours.
Shop Around for Financing
As we discussed above, it can be harder to find financing for an REO home. Banks know there is probably something wrong with the home and they will undoubtedly find out what that is when they do the appraisal. Even before the appraisal, though, you may encounter unwilling lenders.
You may have to shop around or even change programs. One of the more popular programs for the purchase of foreclosed homes is the FHA 203K loan. This rehab loan gives you money to buy and renovate a home all in one loan. This loan allows you to purchase the home without it having to pass the FHA Minimum Property Guidelines.
Of course, there are conditions. You must have a contract with a licensed contractor to do the work necessary to bring the home up to code. The lender must approve any of the work that you plan to do as well as the actual work done. However, the FHA 203K loan is often your best bet when trying to buy a home that is in less than perfect condition.
Learn About the Status of the Title
Another hurdle you’ll have to cross is the title. If an owner couldn’t make his mortgage payments, there’s a chance he has other liens on the home as well. Tax liens are the most common, but other liens could be present.
Learn about the status of the title before you decide to close on the loan. These liens will become your responsibility should you buy the home with their existence. The liens affect the mortgage company’s position on the title, so they won’t let you close on it either, which means you could have another stumbling block. Searching public records yourself and then waiting for the official title search will give you the answers you need.
Close on the Loan
If you get through every stumbling block and are able to come out above water, congratulations, you can close on your loan! Before you know it, you’ll be the proud owner of an REO home that likely needs plenty of fixing up, but it’s yours to do with what you wish now.
Before you close on an REO home, make sure you do your homework. Learn the condition of the home and what you can expect as far as financing. Make sure there is a reputable title company searching the property’s liens and ensuring that you can own the property free and clear if you find the financing to make it happen.