How to buy a house owned by a bank – Forbes Advisor
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If you are looking for a new home, you may have come across a few Real Estate Property Listings (REOs). These types of properties can be a steal, often selling for less than market value. However, there are some risks you should be aware of before considering a REO property.
What are REO properties?
Real estate ownership, also known as bank ownership, is when a lender or government entity, such as Fannie Mae or Freddie Mac, owns the property rather than an individual or business. There are a handful of situations where this can happen.
Often a bank or other institution becomes the owner of an asset when the original mortgage holder seriously defaults on their loan. If this happens, the homeowner may have the option of doing a short sale in order to offload the property and pay off their loan balance.
If the borrower is unable to sell the house and / or pay off the mortgage, the lender will foreclose the property and attempt to auction it off. However, it is common for foreclosed properties not to be sold. At this point, the lender becomes the owner of the property and it will therefore remain on the books of the bank until they are able to sell it in another way.
A defaulting mortgagee can also opt for a deed in lieu of foreclosure, which means that they transfer the interest (ownership) in the property directly to the lender to avoid foreclosure proceedings.
If a homeowner dies or has a reverse mortgage that ends, the property can be returned to the bank if the heirs are unable or unwilling to provide the money to keep it.
How to buy an REO property
Banks don’t want REO properties on their books, they’d rather have cash. This is good news for you, as REO listings are often priced at or below market value to attract buyers.
Here are some steps to take if you are considering an REO property.
1. Get pre-approved for financing
Lenders want REO properties off their books ASAP, so you don’t want the mortgage process to slow everything down. You may want to get pre-approved for a home loan before you start looking for a home so you know your exact budget and can show up to the table prepared, with financing already secured.
If you plan to pay in cash, you will need to obtain a proof of funds letter from the institution that holds your money. This lets the selling bank know that you are financially qualified to purchase the property.
2. Find the REO properties
Once you know the price range you’re working with, it’s time to browse REO listings. Here are a few ways to find them:
- Look for the Multiple Listing Service (MLS). This national database connects buyers, sellers and real estate brokers. You can search the MLS specifically for REOs.
- Check the lists specific to lenders. You can also go directly to a lender’s online listings to see what REO properties they currently own.
- Ask a real estate agent. A real estate agent should be able to direct you to REO listings in your neighborhood. Some real estate agents specialize in REO properties, which can help you find exactly what you’re looking for. It is important to keep in mind that some agents do not prefer to do business with REO properties, so ask the agent up front about their experience in this area.
- Review national real estate websites. Free websites like Zillow and Trulia allow you to search for REO properties in any city.
3. Consider hiring a buying agent
You don’t need your own agent to buy REO property, but it could save you time and stress if someone is negotiating with banks on your behalf. A buyer’s agent will do just that. In addition, they have a fiduciary responsibility to defend your interests. Best of all, the seller usually pays the buyer’s agent, so there is no additional cost to hire one. Ideally, you should be working with an agent who has experience in the area of REO properties.
4. Make an offer
Once you’ve found the right property, it’s time to make an offer to the lender. If you are working with an agent, they can help you determine which offer is likely to be accepted and submit the offer on your behalf. Getting it right is important: if you try to cut the bank, they will likely reject your offer and move on to the next potential buyer.
If your offer is accepted, you will sign a contract with the bank and transfer the property. You may also be required to pay a deposit up front, which is typically 1% to 2% of the purchase price and held in an escrow account until the sale is completed.
Also, keep in mind that with REO properties, the seller will likely charge a penalty for each closing day delayed after the deadline. Scheduling inspections as early as possible and securing your funding in advance can help avoid any delays.
5. Get a home inspection
A home inspection is a crucial step when purchasing an REO property. These homes are sold as is, which means that you are responsible for all necessary repairs.
The property you are considering may be in fair condition. On the other hand, it is common for foreclosed properties to be neglected or damaged by previous owners. A professional inspection will uncover any hidden issues and give you an idea of how much you are likely to spend on making the home more livable after you buy it. It can turn out that an REO property is out of your budget once the maintenance and repairs are factored in.
Additionally, the lender may have performed an inspection when the property became the property of the bank. If so, you can review the report and decide if it is comprehensive enough. However, if the property has been unoccupied for a long time, you may want to have another inspection done. It usually costs between $ 300 and $ 500.
6. Perform a title search
In addition to a home inspection, it is important to perform a title search on the property you are considering. There might be a lien against the house, which is another nasty surprise you want to avoid.
For example, the previous owner may have owed property taxes. When you buy an REO property, you will likely receive a Deed of Release rather than a Deed of Guarantee. This means that the lender is simply transferring the interest in the property and cannot guarantee that there are no lingering judgments against it. Several types of liens survive the foreclosure process, which means you will become liable for them once you purchase the property.
Fortunately, the liens are public records, so you can look up the title of a property for any issues. You can also hire a title search company to do this for you. The cost varies by state, but averages around $ 150.
Advantages and disadvantages of REO properties
Buying an REO property may seem like a cheaper and faster way to buy a home, and it can be. However, these properties also carry certain risks. Consider these pros and cons before deciding if an REO property is right for you.
Benefits of REO properties
- Lenders are motivated to sell: Banks don’t want a bunch of properties listed on their books. This means that owners of REO properties are eager to sell and will endeavor to quickly unload a property. It can mean a head start in negotiations and potentially better terms for you.
- The price will probably be competitive: Because lenders are so motivated to sell, property prices are generally lower than other homes on the market. This does not necessarily mean that you will get an REO property on the cheap. After all, lenders have yet to recoup their losses. But that means you probably don’t have to worry about inflated prices in a hot real estate market.
Disadvantages of REO properties
- REO properties are sold as is: Lenders with REO properties try to minimize their losses. This means that they will not invest anything in repairing a property before selling it. You must agree to buy the property as is, which means there could be some expensive repairs or hidden damage that you will have to pay for. This is why it is so important to get an inspection. You don’t want to discover water damage or a termite infestation after the sale is complete.
- There could be other hidden costs: Aside from general repairs and upgrades that may be necessary, there could be other costly issues. For example, it might turn out that there is a lien on the property. You can buy title insurance to avoid this problem, but it’s an extra expense that can eat into your budget.