What Is a Bank Owned Foreclosure?
A bank owned foreclosure or an REO foreclosure is a (sometimes) distressed property that has gone through the foreclosure process, been unsuccessful at attracting a buyer during a foreclosure auction, and is now repossessed by the bank. You shouldn’t confuse this with a property up for sale at a foreclosure auction, which happens after the property owner has failed to keep up with mortgage payments.
Bank owned foreclosures represent a good opportunity for real estate investors since they now become a liability to the mortgage lenders. To avoid losing money through payment of property taxes, insurance, and maintenance costs, the bank will be looking to sell it as quickly as possible. Therein lies the advantages of investing in bank owned properties. Banks will be willing to sell the properties at discounted prices instead of holding onto them. At this stage, they will try to sell the REO property on their own, commonly through a broker. The bank will prepare the house for sale, evict occupants, remove tax liens, and determine a selling price.
7 Things You Should Know Before Buying Bank Owned Foreclosures
If you are looking to buy an investment property for a bargain, bank owned homes are the ideal solution. Buying bank owned foreclosures has gained a lot of popularity these days since it is a good way for investors to land great deals. Nevertheless, the process of buying a bank owned home is quite different from purchasing a property through a traditional seller. This comes with some benefits and also some downsides. Before you even think of buying a foreclosed home, you should first have a good understanding of this investment strategy. There is a lot of information out there about the purchase of these types of real estate, some of which is not necessarily true. By having the right information, you will be better placed to take advantage of the benefits of this strategy and to take the necessary precautions against any risks.
Here are 7 things you absolutely must know if you plan to purchase a bank owned foreclosure.
1. You May Face Stiff Competition
Many real estate investors now understand that buying bank owned foreclosures is a smart investment decision. When you find a good deal, chances are that other investors have seen it too. As a result, it is likely that many offers will be submitted to the property seller. You should be ready for some competition. To make your offer more attractive, ensure you include a pre-approval letter from a lender to show your ability to pay. You should also formulate an offer that will stand out from the rest, depending on what the seller wants.
2. Bank Owned Foreclosures Are Sold “As Is”
Bank repos are typically sold “as is” since banks have no reason to spend money on non-performing properties. Once you acquire a banked owned property, you will have to pay for all the needed repairs yourself. Keep in mind that some bank repossessed homes will have major issues which may cost a lot of money to fix. It is important to know the property’s shortcomings before you buy it.
You should get a home inspection to determine the main issues associated with the property, estimate repair costs, and to figure out how much to offer. Savvy real estate investors may use these findings to negotiate a better deal. You may want to include an inspection contingency in your offer so that you can have time to check for hidden issues with the property. In case you find hidden damage, you can terminate the offer.
3. You Should Be Financially Prepared
This point relates to the previous one. Most of the time, REO properties will require a lot of repair work since they may have been vacant for a long time. Therefore, you need to have some finances set aside to make these repairs. Through the repairs, you can increase the value of the investment property and even charge higher rental rates. Moreover, if some problems are left unattended, they can turn into bigger problems. You should take these factors into account when deciding if a bank owned home is right for you.
Related: How to Budget for Big Repairs to Your Rental Property
4. There Are No Disclosures
One drawback of buying bank owned homes is that you won’t get to know about the property’s history. This is because REO properties are usually exempt from the normal disclosure requirements. You can overcome this by doing thorough research on the investment property. A lot of due diligence will be needed. You can typically find information on the property in public records.
5. It Can Take a Long Time for Bank Owned Foreclosures to Close
Buying bank owned foreclosures can be a very long process. As we all know, banks are busy institutions. Buying REO properties also involves a lot of paperwork. So, sometimes it can take several weeks before you hear back from the bank. If the offer you submitted is met with a counteroffer, the negotiation process may take even longer. You need to exercise patience until the deal is closed.
6. It’s Not Always a Good Deal
Most people assume that bank owned foreclosures must be below market value and an opportunity for quick money. This is not always the case. Even though the bank is motivated to sell, they are also trying to get as much as they can from the deal. Therefore, every real estate investor needs to be careful during the property search. You should know how to find bank owned foreclosures that can make you a good profit. The secret is to do the math. To find the true value of an REO property, you should conduct a comparative market analysis to check comparable sales in the area. You should then factor in the cost of any repairs needed. This way, you will be able to determine whether a property is good for investment.
Related: How to Spot a Good Real Estate Investment Deal
7. It’s Important to Work with an Experienced Real Estate Agent
The process of buying bank owned foreclosures is quite complex and needs to be well-understood. It can also involve a lot of back and forth with the bank and use of a different real estate contract. Working with a real estate agent who is experienced in buying bank owned properties can help to smoothen the process.
Related: Working with a Real Estate Agent: What Investors Should Expect
The Bottom Line
Buying bank owned foreclosures is a strategy that offers investors an unprecedented opportunity to get good real estate deals. However, what many beginner investors fail to understand is that the purchase of these investment properties varies from traditional deals, which makes it a little challenging. As an investor, you need to consider these differences before making your first purchase. Otherwise, it could turn into a nightmare experience that could cost you a lot of money and time.
Are you interested in buying a bank owned foreclosure? To find the best bank owned foreclosures for sale and other off-market properties, be sure to visit the Mashvisor Property Marketplace. You can then follow with an in-depth investment property analysis using our Investment Property Calculator to see the potential returns.