Important Information to Know Before You Buy a Bank Owned Property

Buying a house from a bank doesn't work like buying a house from a private party. But if you know the differences, a bank owned property can be an excellent opportunity. The following information and FAQ will help you understand what is involved in buying a bank owned home.

Short Sales vs. REO

REO stands for Real Estate owned, and is another way to refer to a bank owned property. This is property that the bank has taken back through foreclosure. Sometimes a seller who is behind in his payments will attempt to sell his house before it goes into foreclosure. To do this, you must negotiate with the bank to accept less than what is owed on the property, and this is known as a short sale. The information here describes purchasing an REO, not a short sale, which is altogether different.

Exempt From Disclosure

Whenever anyone sells a house in Maryland & Washington, D.C., they must by law give the buyer a Disclosure Statement. This document describes what is included in the house, what is broken, and other legal and environmental disclosures. The seller has to tell you about any defects he knows about, especially if they are hidden and you might not see them. The seller can be held liable for defects that appear later that were not disclosed when you bought the house.

The exception to this law is a REO property. Banks are exempt from giving you a Disclosure Statement. For this reason it is absolutely imperative that you do a thorough inspection with a licensed and bonded contractor before purchasing any REO.

Verbal Counters

After the initial offer is made in writing, counter offers are made verbally until agreement is reached. This is a slow process because the bank may be in a different time zone, or the responsible people are tied up in meetings. It may be many days of verbal countering before a final agreement is signed by all parties. During that time, there is the possibility that another offer will come in better than your offer and the bank may accept it. This is especially likely to happen if negotiations stretch over many days or a weekend when more prospective buyers are out looking. The general rule is to try to reach contractual agreement with the least amount of counters. If you are eager to get the property, bring your strongest offer quickly!

Higher Deposits

A bank may require a higher earnest money deposit than a private party would. Expect to write a check for $500 or more when making an offer on an REO property. Many times they will require a full 1% deposit for the Earnest Money Deposit.

Possible Double Loan Applications

The bank may require that you get pre-approved with their institution within a few days of accepting your offer. They naturally want to cut their losses on the property by making a new loan on it, or at the very least ensure that you are well-qualified for the purchase. You will need to go through the loan application process with them, even if you choose to get the loan somewhere else. While they can ask you to apply with them, no one can tell you where to get a loan. That is your choice entirely.

Bank Chooses Settlement Services

The banks strongly encourage you use the settlement and title company that they choose. They have previously negotiated fees with these companies, and may offer discounts and other assistance to you the buyer. While not required by VA law, it is recommended you use their settlement company if possible. Also, many times the settlement officers are so overloaded with business that the real estate agent has to assist in getting the property closed. For this reason, it is important to choose a REALTOR who is willing to work harder than normal to make sure you get the house you want.

Not The Usual Contract

The bank may require their contract be used for final sales transaction, rather than the usual local VA Regional Sales Contract. Generally, they will accept our standard contract and then add their contract "addendum" when agreeable terms have been reached - this is simply the contract written in their own terminology. It is critical that your agent read this form thoroughly to make sure your interests are protected.

Multiple Offer Situations

Often times a foreclosure home is priced so well that several buyers may put offers on the same property. In this case all buyers will be notified by the listing agent and they will be asked to communicate their highest and best offers. Normally there will be a time limit for when these offers must be communicated back to the listing agent. At the time that all offers are received back within the deadline set by the seller they will then be presented to the seller. The seller will then choose which offer he/she deems to be the best overall offer, and will then finalize negotiations with this buyer individually. The bank is under no obligation to give any party "first position" or an opportunity to beat the other offers regardless of how long your offer was in negotiation prior to other offers coming in. This is why it's important to bring your strongest offer and reach an acceptance in the shortest about of negotiation time.

Escalation Clauses

Note that some agents may suggest that you use an Escalation Clause addendum when submitting an offer that is in a Multiple Offer Situation. These often do not work, as the seller's systems are set up to view offers side by side based on the offer number that is entered in the system. The escalation clause goes in a notes field. We can only enter the offer that is on the 1st contract page. When the Asset Manager reviews the offers, they compare them side by side using their system that shows them a net number. Obviously, the note is not taken into consideration in the calculation. Unless they happen to see that note and does their own hand calculation, your highest offer will most likely be missed. Do you want to risk that? The correct strategy is to offer the maximum value that you feel the property is worth.