Bank foreclosures are old hat for us here in the Poconos. Long before the recent rash of foreclosures experienced across the country, we have had a steady supply. (The reasons for this are a whole 'nother article.) Fortunately for our market here, we have had a steady supply of investors and bargain-hunters coming in to the area, too, so these homes have always sold at a decent pace.
So I do have some experience in helping buyers navigate through the process of buying a foreclosure as an investment or as their home. Furthermore, my first house was a foreclosure sale, so I have first-hand knowledge of the experience from the side of a buyer. To summarize, yes, a root canal is almost as fun as buying a foreclosed home, but once the immediate effects wear off, the reward is usually pain-free.
(As clarification, the term foreclosure in this article refers to bank-owned listings being sold through the MLS - other areas call these REO or Real Estate Owned properties)
Buying a bank foreclosure is not for the faint-hearted. For first-time buyers, the process of buying a home is, under the best of situations, stressful and confusing. But even for those who have some experience with previous home purchases, buying a bank foreclosure can be scary.
You are dealing with properties which are usually in need of repair, have no Seller Disclosure or representation with regard to condition and maintenance history, and have been abandoned. Do not discount this last fact, the idea of abandonment, as there is a subconscious effect from this fact for many of us. Why would someone let this house go? What's wrong with it? What did they know that I don't know? No one wants to feel like they are picking through someone else's trash!
But once a purchaser works through all of these emotions, weighs the market facts and finally comes to the realization that there is a huge opportunity to maximize equity by buying a foreclosed property, good decisions can begin to be made. Once a buyer firms up in their mind what kind of repairs they are willing to undertake and shops for and locates the appropriate property, they can approach a transaction armed with the information they need, minimizing their risks and anticipating & addressing possible stress points along the way.
So, what's the big deal? How is buying a bank foreclosure different from buying a property from a 'regular' seller?
THE DREADED BANK ADDENDUM
The banks have their own rules when it comes to selling property. While they do have to comply with real estate law as it exists in the particular state they are selling in, they have gone through this process hundreds or thousands of times and these experiences have caused them to streamline their process. They have corporate attorneys who analyze the risks the banks expose themselves to by virtue of being a seller in a highly regulated industry, and oftentimes have been involved in lawsuits, justified or not. In response to this, most of these banks have come up with a lengthy list of requirements and policies which they spell out on the dreaded Bank Addendum. This Addendum is <usually> a requirement of any offer they entertain, is non-negotiable, and can seem very one-sided and unfair to a purchaser. But the banks are well versed in CYA, so learn about the requirements and cover your own appropriately! Here are some of the more commonly questioned clauses included in these addenda. A discussion with your real estate attorney about their implications may be in order:
- Per Diem Penalty: A penalty for not closing when you say you will. Sure, the bank will extend the contract for you but will often charge you around $100 per day. Remember, time is money to the bank!
- Inspections: Yes, you can inspect. Usually the addendum states that it is for your information only and that they will not make any repairs. The buyer usually retains the right to cancel the contract if there are problems they aren't able to accept. Many times the purchaser is responsible for dewinterizing the property and turning on the utilities for the inspection, but not always. Also, the bank usually requires a fast turn-around on the inspection, often mandating that it be done in as little as 7 days from the time the bank accepts the offer. This is sometimes tricky for an out-of-town purchaser to pull off, but it is not impossible.
- Title Work: Sometimes the bank will pay for the title work on behalf of the buyer. This can be a big savings for a purchaser and, as long as your attorney reviews the policy, should be welcomed. However, be aware that title issues are not uncommon in foreclosure transactions. If the foreclosure proceeding was done sloppily, it will sometimes create a cloud on the title that can take some time to clear. Sometimes it is a simple fix, but other times, like when a Quiet Title Action is necessary, it can delay a closing for months. In these situations a buyer has the option of waiting or cancelling the sale.
Of course, every bank has their own Addendum and the document can vary in length from one page to eight pages or more. One other little tidbit of info: most banks provide the addendum up front so you can review it before making your offer, but sometimes the bank will provide the addendum as part of the counter-offer. Having an idea of what to expect is especially useful in this scenario.
MAKING AN OFFER
Just like with any other listing, an offer on a bank foreclosure is done in writing and utilizes a full Agreement of Sale (AOS). I use the standard Pennsylvania Association of REALTORS® form which is very thorough yet easy to understand. Of course, the Addenda described above would be attached to this form, and if there are conflicting clauses on the AOS and the Addendum, the Addendum takes precedence, unless State Law requires otherwise. Having an attorney help you navigate these nuances is important.
Normal contingencies like mortgage financing and inspections are acceptable to the banks. However, a sale contingent upon the sale of another property usually is not. They prefer to have the contract as clean and unencumbered as possible, thus reducing the risk of the transaction failing to close.
The bank will want to see a pre-approval letter before accepting an offer contingent on financing. Because pre-approval letters are not always a guarantee that a borrower is qualified, they sometimes require the prospective purchaser to fill out a Buyer's Financial Information form in lieu of or in addition to the pre-approval. This is to satisfy themselves that you are, indeed, a good prospect for the mortgage you are applying for. Again, risk reduction in action.
If you are paying cash for the purchase, or even if you are financing the purchase, expect to be required to provide 'proof of funds.' This can be in the form of a bank statement or a letter from your accountant. The bank needs to know that you have enough money to complete the transaction.
GETTING YOUR OFFER ACCEPTED
Keep in mind that the bank is evaluating your offer based on money, timing and risk so, besides carefully evaluating the price you are willing to pay, think hard about the other terms of your offer. The bank wants the transaction to close as soon as possible in order to minimize their carrying costs, and usually require a closing date within 30 days of acceptance. If you want to sweeten the deal, make it two weeks if at all possible. And keep the contingencies to a minimum. No 'Sale is contingent upon seller having the chimney cleaned' or the like. Simple mortgage contingencies and inspection contingencies are expected.
Of course you need to protect yourself and there may be unusual circumstances that require an odd contingency, but try to keep it as simple and as clean as possible.
Another caveat: While banks do value the cost of time and risk, they also have balance sheets to worry about. So keep in mind that your offer is mostly about the price. Cash offers are, very often, favored over those involving financing, but they don't always translate in to huge reductions in price. Buyers who need to get mortgages will often make their offer a little more desirable by raising the sale price. A few thousand dollars more in their offer translates in to small monthly payments for them, while giving the bank the needed plus signs in their ledgers.
Evaluate your position keeping in mind that it is all dollars and cents to the bank.
THE BANK'S COUNTER-OFFER
It is very likely that, if you like a property enough to make an offer on it, other Buyers do too. Even in the slow-ish market we are experiencing right now, multiple offers are very common on bank-owned homes.
When the bank gets more than one offer in on a property, they will usually counter-offer all of the prospective purchasers with a request for their Highest & Best offers.
This means that your offer was not accepted and that they are giving you an opportunity to revise it if you wish. They are letting you know that they have another (or multiple) offer on the table, but will not disclose the amount or terms of competing bids. They want to get the most for the house that they can so this is often the way they go about it. You do not get to know what the other offers are. At this point your choices are: 1-leave your offer the same 2-change your offer 3-withdraw your offer.
Once you go back to the bank with your highest and best offer, they will make a decision. This decision could include accepting one of the offers, negotiating with one or more of the potential buyers, or rejecting all of them. They are not under any obligation to accept anything, and are free to accept any other offers that come in in the meantime.
KNOW WHAT YOU WANT & GET IT!
Do not think that because the real estate market is a bit slower than normal that you are going to steal a foreclosure listing. Banks are well prepared to compete in this market and know what many sellers do not: that pricing a property well will generate offers quickly, in any market. They are not in business to own real estate and do what it takes to sell quickly and for top dollar, which is to price the listings slightly or drastically under market value to generate lots of interest and competition between buyers. This is why Buyers often find themselves in this 'highest and best' scenario - the banks plan it that way!
Moral of the story? Don't mess around. If you want the house and see the value in it, chances are someone else does too. Ask your agent for advice on the value of the property...as-is and as-fixed...to determine how high you should go. And, although the average foreclosure has sold for 96% of the asking price in 89 days this year**, these situations often generate fairly quick, full-price-or-higher sales. If the property is not worth that to you, fine. But don't lose a property you love because you think you SHOULD be able to negotiate it down.
This is not to say, of course, that every foreclosure listing is one you should fight for, but once you and your agent see a few homes in the neighborhood and analyze comparable sales, you will know good value when you see it. If you have analyzed the market properly, you should feel comfortable making an aggressive offer that will win you the sale.
For expert Buyer Representation in your foreclosure purchase, contact me today via email at firstname.lastname@example.org or toll free phone 888.794.5589 !
**Information gathered from the Pocono Mountains Association of REALTORS MLS system on 5/12/08.