If a lender takes ownership of a property, either through an agreement with the owner during pre-foreclosure or at public auction, the lender will usually want to re-sell the property to recover the unpaid loan amount. Check out the tips below to find out how you can navigate a bank-owned purchase.
Find and file properties
It's important to get up-to-date bank-owned property information and act on it as quickly as possible.
If there's no redemption period mandated by state law, the bank may re-sell repossessed property quickly.
Develop a system to keep track of properties that interest you. A good tracking system is important as most foreclosure buyers pursue many properties, sometimes over a period of several months.
After you find a property online, it's a good idea to drive by the property to get a better idea of the property's condition and the type of neighborhood. Some buyers and investors who have driven by the property have found notices posted there that provide more information about the bank who now owns the property. You'll also see if the property is listed with a real estate agent.
Research potential bargain
When you find a property that interests you, perform some preliminary research to make sure the property represents a good bargain opportunity. Your research should not take more than one or two days because you do not want to delay too long before contacting the foreclosing bank. The key pieces of information you need to gather are the estimated market value of the property and the bank's break-even amount.
The bank's break-even amount includes the unpaid balance of the loan, any fees and costs incurred during the foreclosure process and any other liens the bank had to pay off to take ownership of the property.
Contact the bank
You or your real estate agent should initiate contact with the bank to express your interest in the property. Before you expend the time and effort to contact the bank, make sure you're fully prepared to buy.
At this stage of foreclosure it's more likely the property will be listed for sale on the Multiple Listing Service used by real estate agents, so make sure you or your agent checks the MLS. If the property is listed for sale, you can contact the listing agent directly. Keep in mind that the potential bargain often diminishes if a listing agent is involved.
If the property is not listed with a real estate agent, you'll need to take some pro-active steps to contact the foreclosing bank directly. The bank's main focus is not selling property, which means you may need to do some digging to find the department or person at the bank who manages repossessed property.
When you call the foreclosing bank, you should ask for the REO (Real Estate Owned) department, bank-owned homes department or asset management department. Be patient and persistent at this point because it may take some time to get through to this department.
If you have trouble contacting the bank by phone, another option is to overnight or fax a letter to the bank stating your interest in the property. Some buyers and investors include a check made out to a local escrow company to get the bank's attention. This check is usually a small percentage of the total purchase price and should be refunded if no transaction takes place, but it shows you're a serious buyer.
Negotiate a purchase agreement
Once you make contact with the bank's asset manager or REO officer, you should arrange to walk through the property (with your agent if applicable) to make sure it fits your criteria as a buyer.
If both you and the bank agree to proceed, you should start negotiating the terms of the purchase agreement. A real estate agent can be a valuable resource during the negotiating process.
If state law allows a redemption period for the owner after the bank takes ownership of the property, you may have to wait until the end of the redemption period — several weeks or several months, depending on the state — before the bank is willing to sell the property. During the redemption period the owner can regain ownership of the property by paying the total amount owed to the bank plus any applicable foreclosure expenses.
The bank's primary goal is to at least break even on all the costs that it has sunk into the property. That includes the unpaid balance of the loan, the expenses associated with the foreclosure proceedings, other liens and repairs to the property.
Your goal as a buyer is to purchase the property below market value, minus any estimated repair costs. This is often possible if you contact the bank quickly and are a prepared buyer ready to make a purchase.
In the recent real estate market, buying directly from the bank has not been as profitable as buying during pre-foreclosure or at the public auction. That's not to say there aren't good deals available. Many buyers and investors prefer to buy directly from the bank because it's typically a more predictable process than buying during pre-foreclosure or at a public auction.
You'll probably get a better bargain if you're willing to buy the property "as is", meaning you're willing to buy the property in need of a list of repairs disclosed by the seller. Of course, you'll still want to figure estimated repair costs into your final purchase offer.
Banks may be more willing to sell at a below-market price if they have a glut of foreclosures, which are non-performing assets from their perspective. If you're an investor or buyer looking for more properties to purchase, you should let the asset manager or REO officer know to contact you in the future if the bank needs to quickly unload foreclosure properties.
Close the deal
Once you've arrived at an agreement with the foreclosing bank, you can put the agreement in writing. You should have a local real estate agent or real estate attorney help if you're not familiar with how to draw up a purchase agreement.
Any purchase agreement should make closing of the deal contingent on a full title search conducted by a title company or attorney. The purchase agreement should also allow for a professional inspection of the property before closing the deal.
An escrow company, who acts as a third party, can manage the transfer of money and property ownership. Assuming that you have your financing secured, this should be a fairly smooth process.