Buying a Bank Foreclosure Home
There are three ways you can purchase a bank foreclosure home during
the foreclosure process. When a borrower defaults on a mortgage
loan, he or she may try to sell the home before it’s actually
foreclosed. If this doesn’t work, the bank will attempt to auction
the home. The opening bid at the foreclosure auction is usually the
unpaid balance of the loan, plus other costs, which tends to price
the bank foreclosure property above its actual value. Because of
this, these foreclosure auctions are commonly unsuccessful. And when
the foreclosure home isn’t auctioned off, the bank becomes the legal
owner of the property and puts it on the market. Now real estate
owned (REO), the bank foreclosure property is an easier, simpler
investment: it’s unoccupied, its title is clear, and the mortgage
lender has likely paid any overdue taxes. So while typically REOs
sell only for about 5-15% below market value, your small discount is
enhanced by the ease and relative simplicity of your investment.
Evaluate the Bank Foreclosure Property
One of the benefits of investing in REOs is that you have a chance
to really inspect the bank foreclosure property, which foreclosure
auctions do not allow and pre-foreclosure deals’ time constraints
make unlikely. Even if you don’t attend a professional inspection of
the bank foreclosure property, make an appointment with the bank’s
real estate broker and check out the bank foreclosure property
yourself. A walk around the property is obviously the only way you
can see if you’re really interested in investing in the bank
foreclosure home. As you’re examining the bank foreclosure home,
make notes of any necessary repairs – you’ll want to factor these
into your offer for the home. Also, jot down any items you’d like
the bank to remove, including any fixtures. When you’re negotiating
the purchase and sale agreement, you’ll want it to clearly state
that these items are to be removed. Similarly, if there are any
fixtures or other items you really want to keep, you should state
that in the purchase and sale agreement as well.
Find a Good Real Estate Agent
You can purchase a bank foreclosure property without a real estate
broker acting as your representative, but unless you’re already
experienced in foreclosure home investments, it’s a good idea to
find an agent skilled in REOs. A good real estate broker will help
you decide on a realistic offer, taking into consideration necessary
repairs, the down payment, financing, and closing costs. A real
estate agent familiar with and skilled in bank foreclosures will
help you get the best deal possible, as banks – contrary to urban
myth – are not looking to practically give away these foreclosure
properties. A bank’s financial goal with any foreclosure property is
to recover money lost on the defaulted mortgage, including the
unpaid balance of the loan, taxes paid on behalf of the homeowner,
court costs, attorneys’ fees, etc.
Making an Offer
Once you’ve decided on a realistic offer, you’ll submit a written
offer for the bank foreclosure home. If you’re working with a real
estate agent, they should be able to draft your purchase and sale
agreement (often called “earnest money agreement”), which includes:
• Condition and warranties of title
• Conditions of the property
• Your desired purchase price
• Your down payment terms
• Your financing arrangement
• Specification of who bears cost for transfer fees, closing fees,
etc.
• Your “earnest money” or deposit information
• Items or fixtures you’d like to keep or have removed
• Your desired closing date
• Conditions under which this agreement may be canceled
Closing the Deal
If your initial offer is rejected, it’s not necessarily the end – as
in any other sale, first offers often receive counter-offers, and
negotiations can continue until you and the bank reach an agreement.
Once you and the bank have reached an agreement on the bank
foreclosure property, you’ll both sign a final draft of your
purchase and sale agreement. Once this document is signed by both
parties, it becomes a legally binding contract.
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