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How to Negotiate Buying a House from the Bank

Everyone knows that there has been an avalanche of foreclosures in the last couple of years.  A foreclosed home will go to auction, but in many cases the auction will not draw bids that are high enough to satisfy the loan balance, attorney’s fees, interest and other costs that go along with the foreclosure process.  

The winner of a foreclosure auction must have cash (or cashier’s check) in hand, there may be liens against the property, there may often still be someone living in the house.  As you can see, there are many ways that a foreclosure auction can go south and not satisfy the lender’s interest in the property.

At this point, the house winds up back in the bank’s hands and becomes a “real estate owned”  (REO) property.  In the case of a bank-owned home, the mortgage loan no longer exists and is wiped clean.  The bank may evict the person living in the house,  make minimal repairs, and negotiate with the holders of any other liens on the home.  

How to Negotiate With A Bank For REO Properties 

A bank-owned home may not always be a good deal.  Banks almost always want to sell a house in “as-is” condition, possibly with multiple problems.  More importantly, the bank wants to recover its investment in the property and is not interested in “dumping” real estate cheaply.  With the rash of foreclosures, many mortgage lenders have entire departments in place to manage their REO inventory.  

Here are some steps to better negotiate buying a house:

  • Ask for inspection reports.  The bank may not be willing to do this, but they should at the very least come across with a Section 1 pest certification (although you may have to press the issue).  They will allow you to do inspections at your own expense, but may not agree to any repairs. Additionally, there are a number of other things you should be checking for during your inspection.
  • Ask about the number of other offers on the property. The fewer offers, the more bargaining power you have.
  • Shorten the inspection period.  If other offers call for, say, a 17 day inspection period, the bidder with a 10-day period may be seen as the more serious bidder. This can be a frustrating process, but there are a few ways to alleviate the pressure associated with inspection periods.
  • Ask if the bank will agree to do any work. This will take some of the burden off your shoulders and help make the process move a little quicker.
  • Check into comparable home values for the neighborhood.
  • Ask for a special “as-is” form.
  • Be ready with a pre-approval letter and buyer biography to make your offer easier to accept.

With your agent, prepare an offer.  The bank will usually make a counter-offer, and then the real negotiation begins.  Expect this process to take awhile, since nothing gets done on evenings and weekends, and any offer or counter-counter-offer will usually be “subject to corporate approval within 5 working days.”  

If you do make it this far, the bank will provide title insurance for the transaction.  They will usually not do financing on an REO property, but it can’t hurt to ask.  Remember, though, that in many cases the “foreclosure bargains” that you see on late-night infomercials are not such great deals. The bank has an interest in any bank-owned property, and will be looking to recover its money.