What is a Bank Owned Home? A Guide for REO Properties
When it comes to buying a home, many prospective buyers might come across a property labeled as “bank owned.” This term, commonly seen in real estate listings, refers to homes that have been foreclosed upon and are now owned by the bank or lender that financed the original mortgage. Bank owned homes can offer a great opportunity for homebuyers, but there are several aspects to understand before pursuing this type of real estate purchase.
What is a Bank Owned Home?
A bank owned home, also referred to as an REO (Real Estate Owned) property, is a house or property that has gone through the foreclosure process and is now owned by the lending institution that took possession of the property after the borrower defaulted on their mortgage. To understand this, let’s first explore the foreclosure process.
How a Home Becomes Bank Owned
The path to a home becoming bank owned begins when a homeowner is unable to make their mortgage payments and defaults on the loan. After missed payments, the lender—usually a bank or a mortgage company—will start the foreclosure process. Foreclosure is a legal procedure that allows the lender to take possession of the property to recover the outstanding debt.
- Missed Payments and Pre-Foreclosure: The foreclosure process typically starts after several missed payments, usually after 3–6 months of delinquency. The lender will attempt to work with the homeowner to catch up on payments or modify the loan. However, if this is unsuccessful, the process moves to the next stage.
- Notice of Default: If the homeowner fails to reach an agreement with the lender, the bank will file a Notice of Default (NOD) with the county, indicating that the homeowner has defaulted on their loan. This notice publicly records that the home is in jeopardy of foreclosure.
- Auction: Once the Notice of Default is filed, the lender will attempt to sell the home through a foreclosure auction. During this auction, the lender sets a minimum bid, typically equal to the amount of the mortgage debt plus legal fees. If no one bids at or above this price, the property remains unsold.
- Bank Takes Ownership: If the home doesn’t sell at auction, the bank takes possession of the property, and it becomes bank owned. At this point, the lender will list the property for sale through traditional real estate channels in an effort to recoup as much of the loan balance as possible.
Pros & Cons of Purchasing a Bank Owned Home
Pros of Buying a Bank Owned Home:
Buying a bank owned home can present several advantages, but it’s important to proceed with caution. Here are some potential pros of buying a bank owned home:
Lower Purchase Price: Bank owned homes are often priced below market value, providing potential savings for buyers.- Potential for Investment: Bank owned properties may offer opportunities for investors to buy low, renovate, and resell or rent for a profit.
- Opportunity for Bargain Deals: If the bank has been holding the property for a while, it may be willing to lower the price further to get it off their books.
- Potential for Less Competition (for some buyers): While investors often compete for bank owned homes, some buyers may find less competition compared to the traditional homebuying market.
Cons of Buying a Bank Owned Home:
While buying a bank owned home can offer some great deals, there are also cons that come with buying a bank owned home.
- Sold As-Is: Bank owned homes are typically sold without any repairs or warranties, meaning buyers are responsible for addressing any issues.
- Possible Property Damage: Many bank owned homes have been vacant for an extended period, leading to potential damage from neglect, vandalism, or weather.
- Limited Disclosure: Banks usually don’t provide any type of detailed information about the property’s history or maintenance, leaving buyers with little insight into past issues.
- Longer Closing Process: The bank’s bureaucracy and paperwork can result in a longer and more complicated closing process compared to traditional home purchases.
- Competition from Investors: Many bank owned homes attract investors with cash offers, making it more difficult for regular buyers to compete especially those obtaining financing.
- Higher Risk of Title Issues: Although banks usually provide clear titles, problems can still arise, especially if the foreclosure process wasn’t handled properly.
How to Buy a Bank Owned Home
If you decide to pursue the purchase of a bank owned home, it’s important to approach the transaction with the right knowledge and preparation. Here are steps to follow when buying a bank owned property:
1. Get Pre-Approved for Financing: Before you start shopping for bank owned homes, if you are not paying cash, make sure you have financing lined up. This means getting pre-approved for a mortgage, exploring the different loan programs you qualify for and obtaining a pre-approval letter for the loan program you select.
2. Work with an Experienced Real Estate Agent: Bank owned homes can have unique nuances, so working with an experienced real estate agent is a must. An agent familiar with REO properties can help you identify potential issues, negotiate with the bank, and guide you through the entire home buying process.
3. Submit a Competitive Offer: When making an offer on a bank owned home, be prepared to submit a competitive offer. Also, expect for the bank to use their own contracts, which will be in their favor. Since banks are interested in recouping their losses quickly, they may be more likely to accept an offer below list price as long as it makes financial sense.
4. Conduct a Thorough Inspection: Always invest in a professional home inspection to uncover any hidden problems with the property. This will help you determine whether the home is worth the investment or if the necessary repairs will exceed the market value of the property.
5. Be Prepared for a Lengthy Process: As mentioned earlier, the process of buying a bank owned home can take longer than buying a traditional home. Be patient, and ensure you have all of your financing and documents in order to avoid delays. Also, be prepared for the deal to fall apart. Most banks will put a clause in their contract giving them the right to cancel the contract for specific reasons.
Frequently Asked Questions About Buying a Bank-Owned Home
Are bank-owned homes cheaper than traditional homes?
Bank-owned homes are often priced below market value. This is because the bank wants to quickly sell the property and recover its losses, which can make bank-owned homes an attractive option for buyers looking for a bargain. However, not all bank owned will be cheaper in the end.
Do bank-owned homes come with a warranty or guarantees?
No, bank-owned homes are typically sold “as-is.” The bank will not make repairs or offer any warranties, so it’s important for buyers to do their due diligence.
Can I negotiate the price of a bank-owned home?
While banks are motivated to sell the property, they often have a fixed price or limited flexibility on the sale price. However, there may still be room for negotiation, especially if the property has been on the market for a while or requires significant repairs.
Do I need to make an offer on a bank-owned home quickly?
Bank-owned homes can be priced competitively, so it’s advisable to make an offer quickly, but only if you’re interested.
Can I see the inside of a bank-owned home before making an offer?
Yes, most bank-owned homes are listed with a real estate agent and are available for showings.
What happens if a bank-owned home is in poor condition?
If the home is in poor condition, the buyer may have to pay for extensive repairs. While banks typically price these properties lower to account for the cost of repairs, it’s important to factor in potential renovation costs before making a purchase.
Is the closing process for a bank-owned home different from a traditional home purchase?
Yes, the closing process for a bank-owned home can be more complex and take longer. Banks often require additional paperwork and may take longer to review offers or respond to buyers. It’s essential to be patient and work with a knowledgeable real estate agent to help guide you through the process.
Can I make repairs to a bank-owned home before closing?
No, typically repairs are not allowed before closing. The property will be sold “as-is,” and any necessary repairs must be handled by the buyer after the closing.
Do bank-owned homes have liens or unpaid taxes?
Banks usually clear any existing liens or unpaid taxes before listing the property for sale. However, it’s important for buyers to perform due diligence and confirm that the property has a clear title.
Can I make an offer on a bank-owned home with contingencies?
Yes, you can make an offer with contingencies, such as a financing contingency or an inspection contingency. However, keep in mind that banks may not be as flexible with contingencies as individual sellers, and they might prefer offers without them to speed up the process.
What should I do if I’m interested in buying a bank-owned home?
Start by getting pre-approved for financing, if you’re not paying cash. Work with a real estate agent experienced in REO properties to help guide you through the process. Ensure you schedule a thorough home inspection to identify any hidden issues, and be prepared for a potentially longer closing timeline.
Final Thoughts
A bank owned home can be an attractive option for homebuyers looking for a bargain or investors interested in flipping or renting properties. However, buying a bank owned home isn’t for everyone nor is it always the best “deal.” So before a buyer jumps in with both feet they need to understand what they’re jumping into a local agent will be able to guide them through the process.
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About the Author
Top Wellington Realtor, Michelle Gibson, wrote: “What is a Bank Owned Home? A Guide for REO Properties”
Michelle has been specializing in residential real estate since 2001 throughout Wellington Florida and the surrounding area. Whether you’re looking to buy, sell or rent she will guide you through the entire real estate transaction. If you’re ready to put Michelle’s knowledge and expertise to work for you call or e-mail her today.
Areas of service include Wellington, Lake Worth, Royal Palm Beach, Boynton Beach, West Palm Beach, Loxahatchee, Greenacres, and more.
