Critical Facts 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. Here’s what I’ve learned from representing many buyers in purchasing bank owned properties.
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, which we’ll discuss later.
Exempt From Transfer Disclosure
Whenever anyone sells a house in California, he must by law give the buyer a Transfer Disclosure Statement (TDS). 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 an REO. Banks are exempt from giving you a TDS. For this reason it is absolutely imperative that you do a thorough inspection with a licensed and bonded contractor before purchasing any REO. You must be extra diligent in all your inspections, because you have no recourse after you buy it.
After the initial offer is made in writing, counter offers are made by the bank 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 countering before a final agreement is signed by all parties. During that time, there is a danger that another offer will come in better than yours and the bank may accept it. This is especially likely to happen if negotiations go over a weekend. So my advice is: try to reach agreement with the minimum amount of counters.
A bank will require a higher good faith deposit than a private party would. Expect to hand-carry a cashier’s check for 3% to 5% of the purchase price when making an offer on an REO.
Double Home Loan Applications
The bank will probably require that you get a prequalified loan with their institution within a few days of accepting your offer. They naturally want to cut their losses on the distressed property by making a new loan on it. You will need to go through the home loan application process with them, even if you get the loan somewhere else. While they can ask you to apply with them, no one can tell you where to get a home loan. That is your choice entirely.
Bank Chooses Services
The bank will insist on an escrow and title company that they choose. They have previously negotiated fees with these companies, so they know what their expenses will be. You would think that to get the business of these giant banks, these escrow companies must be really good. But you would be wrong! They get the business by charging less, and the service is often substandard. Many times the agents do the job of the escrow officer. For this reason, it’s most 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 will use their contract, not the standard California Association of Realtors form. It’s critical that your real estate agent read every word of this contract to make sure your interests are protected. Remember the bank’s attorneys who wrote the contract are representing the bank, not you. I’ve seen banks completely disregard California law in their contracts, and there is nothing you can do about it. If you want the property, you sign their contract.
Sometimes banks will not pay for HOA transfer fees, HOA document fees, termite repairs, home protection plan, or other items typically paid by the seller. Or they might not pay to have the utilities on for your inspection – you’ll have to call the utility companies and have them turned on in your own name. It’s a good idea to mentally subtract these costs from the price you would offer a human seller.
Shorter Inspection Times
Our contract typically calls for 17 days to do inspections, but banks will usually give you only 5 days. This means inspections have to be done in a hurry, so make sure your agent has a way of getting them all done in the time frame allowed by the bank.
Double Check Everything
I’ve found that listing agents and escrows for the banks are overloaded with work. Repairs may get ordered, but there is seldom a follow up to see that the work was done. Your agent must take it upon himself to double check everything and assume nothing. When you buy an REO, make sure you select an agent that represents you and not the bank. Select an agent that has experience working with banks and is not afraid of some extra work so you’re protected.
How to Buy a Short Sale
I’ll explain the steps involved in buying a short sale property, but first let me define a few terms.
What is a short sale? A “short sale” means that if the owner sells the property, there won’t be enough money to pay the bank what is owed. The owner is “short”
The “borrower”, the “owner”, and the “seller” are all the same person.
The “bank”, also known as the “lender”, does not own the property. Even so, for the owner to be able to sell the property he needs the bank’s agreement to discount what is owed.
The “package” is the documentation that must be sent to the bank so they can decide whether or not to accept a short sale and at what price.
The “agent” is the professional real estate agent that the owner hires to market the property and represent him during the short sale process.
Short Sale Offer
Here’s how getting an offer works. The seller and his agent decide to attempt a short sale. There is no guarantee that a short sale will work, since the bank may or may not go along with it. While experience tells us which circumstances have the best chances of success, the rules are constantly changing so no one can predict the outcome with certainty.
The agent’s first job is to create the package. This involves, among other things, hardship documentation, a Broker’s Price Opinion, photos, and most importantly an OFFER. The bank will misplace (this is code for shred) any incomplete package, so there is no point in submitting a package without an offer.
How does the agent generate an offer quickly? By listing the property at an unreasonably low price. The owner will net zero from the sale, so the price doesn’t matter to him. The agent’s first priority at this point is only to generate an offer, any offer. In fact, the agent might know some investors who will throw a lowball offer at anything, and in this case you see the listing hit the MLS with an accepted offer on day one. “Accepted offer” means the seller has signed it, but remember the seller is powerless to sell the property unless the bank goes along.
Short Sale Negotiation, Waiting For The Bank
So now the waiting begins. It takes the bank 3 to 4 months to decide if they will allow a short sale, and at what price they will do it. During this time the property is still listed on the MLS as “Active”, since the bank has not approved the short sale yet. This is why you see listings at very low prices that have been on the market for 100 days. You’re wondering “what’s wrong with this property?” Nothing is wrong, it’s a crazy low price on a short sale and the seller is waiting on an answer from the bank.
During this waiting time the seller is either allowing showings or not. If the seller allows showings, you can make an offer which will be considered a “backup offer”. As you might imagine, in several month’s time it’s common for many backup offers to come in.
Once the seller has enough backup offers, he may decide that it’s nutty to keep having people come through the house, since they have plenty of offers and they aren’t even sure that a short sale will work. So why bother? If the seller comes to this conclusion, the listing will still be active in the MLS and yet you can’t see it or make an offer on it.
Bear in mind that none of this information is stated in the listing description that you see on the Internet. You might not know that it’s a short sale, or where it is in the process, all you see is a house at what looks to be a great price.
Short Sale Timeline, Months Later…
When the bank completes their own appraisals and due diligence, they will answer the seller. There might be all kinds of negotiating at this point between bank and seller, as to what the bank will accept as a loan payoff and what responsibilities the seller has. The seller might have to come up with some money or give the bank a promissory note. If the bank and the seller can’t come to terms, there will not be a short sale.
But let’s assume the bank and the sellers agree on what has to happen for a short sale to take place. The bank at this point will state at what price they will do a short sale. We then call this an “approved short sale” meaning that the bank has approved it. The price is probably NOT what the agent has in the listing, it’s usually more and it might even be significantly more.
At this point the person who made the original offer usually walks away. The price is not what he was hoping for. The bank might then ask the agent to see the backup offers and decide to accept or send a counter offer to one of them. They might ask everyone to submit their “highest and best” offer within 24 or 48 hours. At this point the agent might put the new price into the MLS and say the short sale has been approved and generate some new offers. There are no rules to this game; it goes however the bank wants to play it. They call the shots, because without their approval, no sale will take place.
So if you’re still interested 3 to 4 months after you made your offer, and if you’re willing to up your offer so that it’s the highest and best, then congratulations! You succeeded in purchasing a short sale property.
If you’re looking for a short sale in San Diego I can help! Good luck and may you find an excellent bargain that’s just right for you.