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Bank Foreclosures: The Buying Process
Also known as Real Estate Owned (REO) foreclosures, bank foreclosures occur when a property owner is unable to make the necessary payments on his or her bank-held mortgage loan. In that event, the bank that played the role of lender forecloses on the property to repossess it and hopefully recover what it can.
It's during this time that most experienced investors will pounce, because they know that owners are more than likely to sell their homes at this point to avoid foreclosure. Usually, during the foreclosure period, owners are willing to negotiate a lower price for their home because being foreclosed on screws up your credit scores a great deal. This works out well for both parties, as the homeowner avoids damage to their credit score and you, the buyer, get the chance to buy a house for a fraction of the original cost.
There are many instances in which a sale does not occur, though, and if that happens, the title of the home is transferred to the bank. This is hardly ideal, and it's usually the banks who greet this news with discontent, as banks aren't designed to function as real estate brokers. This is the case for several reasons, but there are three specific reasons that stand out among the others:
- Foreclosed homes cost a great deal to maintain. There are tax payments, insurance payments, maintenance costs, and security measures that must be taken.
- It makes the bank look bad. Bank foreclosures are often the result of poor lending decisions. If the bank is holding a number of homes, they've made a number of poor lending decisions.
- The bank needs to recover whatever money was lost on foreclosures. Simply put, banks need to cut their losses sometimes.
Once a bank takes over a property, the mortgage loan on that property ceases to exist. The same goes for any tax liens and homeowner's association dues, as the bank will communicate with the IRS to remove the liens and pay off the dues.
As soon as all that is taken care of, the task of selling the property begins for the bank. All banks work differently, but each bank's intention is to get the best deal possible on their recovery investment. You will not find banks selling real estate for fractions of the cost like you will with other lenders.
When you do make an offer to a bank, . Have a real estate agent handy, because you should expect to do some negotiating throughout the sales process. Usually banks are only offering a higher figure than you'd expect on the counter-offer because they need to prove to investors and shareholders that they made an attempt to get the highest price possible on their return.
Most of the time the bank will have a staff trained to handle REO transactions, a fact that supports the thinking that REO foreclosure purchases are the least risky of all the foreclosure deals possible. In addition to this, REO foreclosures can be inspected, the sale can be subject to you getting a mortgage, and you have the right to demand a clear title. Because of all these assurances and benefits, bank foreclosed homes are generally the least financially beneficial to investors and buyers planning on selling their home after only a few years.