What Is a Bank Owned Home?
A bank owned property, also known as REO (Real Estate Owned) property, is a property acquired by a bank after it fails to sell in a foreclosure auction.
When a homeowner is unable to keep up with his/her mortgage payments, the mortgage lender will foreclose on the home and take control of it. In an effort to recover any lost revenue, the bank will try to offer the property for sale at a foreclosure auction. When the property fails to sell, the bank becomes the owner.
There are many bank owned homes in the US real estate market. These properties offer real estate investors a number of opportunities that may not be available in the pre-foreclosure phase or with foreclosures. Yes, there are many success stories about people buying a bank owned home. However, making money with bank owned homes is not as easy as it may seem. There are also downsides to buying these properties. If you are thinking of buying a bank owned home for investment, you should take the time to understand its pros and cons. This will enable you to see if it is a good investment for you.
Here are the pros and cons of buying a bank owned home for investment:
PROS
1. You can buy a home for below market value
Getting a home for below market value is one of the main benefits of buying distressed property from a bank. If you do your homework well, you are likely going to get a great deal. Buying a bank owned home below market value offers instant equity.
Banks are typically not in the business of owning property. By holding on to their REO properties, the bank will be losing money in taxes and maintenance. As a result, banks are often motivated to sell the property as quickly as possible and recover the capital they loaned. This leads to a very competitive price that is below market price and great terms like low down payment and lower interest rates.
Depending on the condition of the property, location of the property, and time on the market, the price may reduce significantly. Understanding these factors will help you to successfully negotiate with the bank to get your offer accepted.
Related: Buying a Rental Property Below Market Value
2. Negotiations can be easier due to no emotional attachments
Many individual homeowners can be emotional about the sale of their home, unlike a bank. In the negotiation process, banks usually make decisions quickly based on well-known parameters without any emotional ties to the home. This leads to transactions that are faster and more predictable.
Related: 8 Negotiation Tips for Buying an Investment Property
3. The property is usually vacant
Unlike acquiring properties at foreclosure auctions, bank owned homes are often vacant because the previous owner has usually been evicted. The properties are easy to access, making viewing them easier. Buying a bank owned home also saves the real estate investor the time and money needed for the eviction process.
4. There is less competition
Not many buyers have the ability to finance the purchase of bank owned real estate and then put more money to fix it up. For the right person, this could be a great opportunity, especially in a seller’s market.
5. The property normally has no outstanding taxes and title liens
Before bank owned properties are made available for sale by mortgage lenders, they usually remove all claims or liens against the property. This way, property investors can close the deal much faster and also save a lot of money.
CONS
1. It can take a long time to close
Buying a bank owned home will often require a huge investment of your time- more so than typical real estate transactions. Unlike purchasing from an individual owner, the process of buying a bank owned home can be long and frustrating. Banks are notorious for taking very long periods of time before approving these types of sales. However, the period taken will depend on the bank that owns the property and their current backlog level. If you are in a position to wait, then it is okay.
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2. The property is sold ‘as-is’
Bank owned homes are usually sold ‘as-is’. This means that the buyer is the one who does the repairs after the closing of the deal. Be sure to get a home inspection from a professional inspector before closing on the home to know what you’re getting yourself into.
3. There are no seller disclosures
Foreclosed bank owned properties usually have no seller disclosures and the bank provides little information about the history of the home. You are basically flying blind. This can risky. You can overcome this by doing due diligence on the investment property.
4. The property may potentially have high repair costs
Most bank owned properties for sale have been sitting vacant and have had little or no maintenance, sometimes for years. You can end up with an investment property that requires a lot of work, which could be costly. For beginner real estate investors with no experience in buying and fixing up properties, the process tends to catch them off guard. This can lead to their financial downfall. Since banks don’t usually know how much work is needed and there are no seller disclosures, you should try to figure out the areas of the home that need to be addressed. It is important to have a thorough inspection to calculate the amount needed to improve the home.
5. Financing is restricted
When buying a bank owned home, financing is very restricted. If the home is not in decent condition, it may not qualify for an FHA or VA loan. Therefore, buying bank owned property with cash is usually the norm.
Related: The Best Approach to Investment Property Financing in 2019
The Bottom Line
Buying a bank owned home can be a great opportunity to get the investment property of your dreams at a great price. However, buying bank owned homes also comes with a unique set of challenges and risks. The biggest problem with most buyers is that they jump into buying REO property head first without giving it much thought. You ought to first consider the pros and cons of buying a bank owned home to make sure it is the right thing for you.
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