What it’s like buying a Bank Owned Foreclosure

You’ve been looking and finally found the house you want to buy and it is a foreclosure, also known as an REO (Real Estate Owned –“by a bank”).  Usually these are considered a good deal, at least they typically are priced a little below the going rate.

Here is what you need to know.  There are no disclosures, nothing telling you the next door neighbors might be noisy or maybe water leaks under the house in heavy rains.  There are reasons for this; the bank has never lived in the house so they don’t know anything about it.  The former owners that got foreclosed on are not anxious to help the bank sell the house.  Also, those owners might make the house look better or worse than it is just to “get back at the bank”.  All this means you better do your homework and get inspections so you know what you are getting into.

When you write an offer on a foreclosure it may take several days for the bank to let you know if your offer is accepted, we are talking bankers’ hours.  Most of the larger banks with counter your offer, even if they like your price, with an addendum that turns the whole purchase contract in their favor.  For example, in a typical purchase contract you might have 17 days to do your inspections and if you don’t expressly remove the Inspection Contingency you can get out of the contract without losing your deposit.   The banks addendum changes that so if you don’t remove your Inspection Contingency by the given date it is assumed everything is okay and you are stuck in the contract.  Not only that but they usually give you just 5 to 7 days to complete inspections.

I suppose we could live with the shorter timeline and passive removal of contingencies except it is usually not clear when your timeline starts.  This is because when the bank counters your offer with their addendum they may sign it one day and you don’t receive it for several days after that.  Usually that would not be a problem but the bank form might say the start date is when it is signed by the bank.  At this point I can’t guarantee my clients what the real start day of the contract is so we have to go conservative and assume it starts when the bank signs it.  That can take our 7 day inspection period down to just a few days or worse if it is Friday or a long weekend.  No problem, right?  All we need to do it issue an addendum asking for more time for our inspections.   The listing agent will say okay and send it to the REO bank.  Problem is the bank never signs the extension but you are told it is okay.  We all know everything in real estate has to be in writing but we can’t get the bank to sign anything.  I have to say, so far, the banks have been honorable with their word but who wants to be there when they aren’t.

If a buyer get emotional in a multiple offer situation they may offer more than they wanted once all the dust settles.   No problem for the bank, their addendum takes care of that for them.  If you want the deal they make you sign a form that says if the home appraises for less that your offer you will still go through with the deal and make up the difference with a larger down payment.

Regardless of all these problems with buying a bank owned foreclosure, REO, it likely will still be less frustrating that buying a Short Sale…

Warren Carreiro

warren@RealtyOfMarin.com

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