One of the sad facts of our current economic climate is that instances of home foreclosures are rising, but, as is normal in a capitalist society, what is bad for some can be a boon to others. Such is the case with foreclosures: those people who still have liquid capital are often able to purchase foreclosed homes for far less than the original owners had to pay.
Foreclosed homes are often listed as bank-owned or REO (real estate owned), and the reason the bank has received the property deeds is because no one showed up at court to make a minimum bid on the existing loan.
Just as with “normal” home sales, there are many places to find foreclosed homes, including the Internet and the local paper, but one of the most reliable is to use a realtor. REO realtors come in the same two flavors that regular realtors do: listing agents and buyer’s agents. Here’s a brief rundown of what they do:
If you are already working with a buyer’s agent, you can ask her to do an MLS (multiple listing service) search for REOs, and she – and you – will likely find that there are a small number of realtors who specialize in such properties.
Most of the time, REO listing agents:
* Work only with REO properties
* Give discounts to the banks whose properties they represent
* Make money either in volume (representing many properties) or by acting as a dual agent – representing both buyer and seller (in this case, the bank)
* Will often discount their own commission, and increase the commission a buyer’s representative will earn.
* Are the top producers in their offices, largely due to volume
* Have assistants who handle all their phone calls.
These realtor, who represent buyers (in this case, you), are vital assets in the real estate world, because their job is to negotiate the entire transaction on your behalf. Even if you have bought or sold a home before, you should at least consider working with a realtor when you begin shopping for REO properties. Here’s why:
* Buyer’s agents have a fiduciary responsibility to you, and must work to protect your interests.
* While they do not represent the seller, they are generally paid by the seller.
* Just as with listing agents, there are buyer’s agents who specialize in REOs.
What to Expect in an REO Transaction
If an REO listing is newly on the market, it’s quite likely that the bank will not be willing to engage in much price negotiation, so if you are adamant about not paying the asking price for a foreclosed home, you’ll find yourself in a stronger position if you look at homes that have been listed for 30 days or longer. Other things to expect are:
* Banks tend to negotiate bulk-rate discounts with title and escrow companies, so check the fees those companies are charging, as some of them will increase buyer charges to make up the discounts. (Remember that if you are paying the title and escrow fees, you are not required to use the bank’s preferred company.)
* Most banks will not pay typical closing costs on foreclosure sales, so you should expect to pay all of the transfer taxes (rather than 50%), county and state fees, the fees for any inspection reports, and the costs for a home warranty (though many realtors will offer their clients the first year of a home warranty as a sort of incentive).
* Many banks will not sign counter-offers until all parties have come to a verbal agreement on the terms.
* The bank may wish to draw its own purchase contract, or add an addendum to the standard real estate contract used in your state (another reason why a REO savvy buyer’s agent is a must).
* It can take up to ten days before a bank responds to an offer.
* You may be asked to submit a loan application to the bank holding the property, so they can pre-qualify you, even if you don’t plan to get your loan from that bank. (It is illegal for them to require that you use them.)
* If you cannot close by the date agreed to in your contract, the bank will likely impose a penalty for every day beyond.
* You will almost certainly be asked to buy the home “as is.” Make your offer subject to a home inspection (property inspection) because some defaulting homeowners react to their situation by stripping assets from the home, right down to copper piping.
Drawbacks of Foreclosures
Even with the best buyer’s agent on earth representing you, there are still drawbacks inherent to purchasing foreclosure properties. These include:
* Tenants: If the property was non-owner occupied before foreclosure, there may be tenants who are unwilling to leave, some of whom may have stopped paying rent. You may have to negotiate their move-out, or even bribe them, and if they are evicted, they may damage the home.
* Property Condition: As mentioned above, homeowners facing foreclosure often react by stripping the property of light fixtures, copper piping, etc. Most banks will not pay for these repairs, so be aware that you may have to fund more than just a mere home purchase. As well, if a home was vacant for a long while, it may have been vandalized.
* Animals: In some cases, homeowners who went through foreclosure have abandoned their pets in the home. You may find weak, sick, injured, or dead pets left inside. Try to be as compassionate as possible.
Despite the rigidity of lenders and the possible drawbacks that come with REO properties, they can still be a profitable investment. This is because lenders would rather not have to maintain vacant homes, and because every home that has an owner in occupancy helps improve the value of surrounding properties.