How is buying a foreclosure from a bank different from buying a home from a private seller on the regular resale market?

Asked by Trulia San Francisco, San Francisco, CA Thu Nov 15, 2012

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Zannie, Home Owner, Anza Vista, San Francisco, CA
Fri Nov 16, 2012
Having just bought an REO in May, I can give you my personal experience, which is that the biggest difference is not knowing much of the property's history. The bank is required to give you disclosures, but the bank can't possibly know all the things that someone who actually lived there would know.

What's that little hole in the fireplace marble?
When's the last time the fireplace was inspected?
Do these light sockets that don't have bulbs in them work?
What does this light switch do?
Is this solid hardwood or engineered hardwood? Has it ever been refinished before?
How much does it usually cost to heat the place?
How are the neighbors? Are they loud?
Why is there non-standard plumbing under the sink?

You don't get answers to questions like these when you buy an REO home. There's also the risk that the previous owner did some subtle sabotage, though that's probably a greater risk with auction sales than with REO resale.

Because of this lack of information, I would recommend negotiating that the seller pays for a 1 year home warranty, for your peace of mind. Also, be sure to have it thoroughly inspected, and go along with the inspector and write down everything they tell you about the place. The inspector will tell you things verbally that won't end up in their report.

This is my first home so I don't have anything to compare this purchase to, but this lack of information has been the biggest drawback I've seen to buying an REO. Although I find it a little frustrating at times, all things considered, I'm very happy with my purchase. I got a good deal (everyone I've told the purchase price to has been very impressed) and everything has worked out well so far.
2 votes
Alina Aeby, Agent, San Francisco, CA
Fri Nov 16, 2012
My colleagues already provided great answers. There are few more I would like to add regarding the differences between a regular resale and a REO sale( which is also a resale, by the way, since the bank already owns that property):

-many times the REO's are listed bellow the market price and that leads potential buyers to believe they can get a bargain and multiple offers are in order;
-when a bank issues a multiple counter offer, you don't know where you stand and what your competitors have offered. Instead of a number figure, your counter offer will sound like this: 'MAKE YOUR BEST AND HIGHEST OFFER' ;
-because banks are notoriously bureaucratic institutions and your final purchase contract will have to go through a lot of departments, the initial negotiation will be done mostly through the email. Once the terms are settled, the bank will draft the final contract documentation;
-on a plus side, a lot of banks-sellers offer credits toward closing costs and if you choose their escrow and title company( which if you are in California, will be located in Southern California most of the time), they may pay for your escrow and title insurance.

I hope this helps.

Good luck,

Alina Aeby-Broker Associate
Pacific Union International
Cell: 415.744.4844
2 votes
This was exactly my experience.
Flag Fri Nov 16, 2012
Jerry Guay, Agent, San Francisco, CA
Fri Nov 16, 2012
There is very little difference once listed on MLS, and Banks have a minimum 7-14 day market exposure prior to responding to any offers. You will have the opportunity to inspect the property to determine it's physical condition, obtain financing etc. Corporate sellers tend to be more strict in contract language and enforcing contract timeframes, as they can unilaterally cancel the deal at any point for any reason whereas a typical seller could not.

Botton line is they are not typically a better deal than a regular sale. Your best shot at a potential below market deal is either a short sale or trustee sale (all cash auction) at the court steps.
1 vote
Artur Urbans…, Agent, Burlingame, CA
Fri Nov 16, 2012
As my predecessors mentioned, prior to a foreclosure (Sheriff's Sale), you can buy it from the Seller (possibly as a short sale, but it can be a regular sale as well), but only if Seller decides to hire an agent and put it on the market. Most distressed properties are never listed for sale, however. You still can attempt to buy such properties by proactively approaching owners of distressed properties and making an offer. It is not an easy task.
The key difference while buying on the regular resale market (MLS) prior and after foreclosure is in the price. Bank owned (REO) property will be usually more expensive, as both, bank and listing broker may pass additional costs. As long as properties are listed on MLS - you will have disclosures. It is not the case during a foreclosure (Sheriff's) sale when you you can pay less for a property, but without a possibility to inspecting prior to purchase. Short sales (not all!) are still the best deals on the regular resale market, especially if previous sale(s) fell through. It is much easier to negotiate good price with banks if the house is listed fro 6 to 12 months and still has not sold. They "had it "and they want it of the books. Unfortunately, you never know the outcome, so it can be very frustrating.
1 vote
Rob Regan, Agent, San Francisco, CA
Thu Nov 15, 2012
The biggest difference is in disclosures - a private seller owes you disclosures the Bank doesn't or can't provide. The bank never lived in the home for example, so you won't get nearly as much insight into the home. The bank may also push off certain costs to you. Other than that, if it is listed on the MLS through a Realtor, everything else about the purchase is going to feel pretty similar.
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1 vote
Leopold A Ro…, , San Francisco, CA
Thu Nov 15, 2012
In theory banks are not as emotionally committed to the sale as private owners. They don’t care that Timmy grew up playing in the sand box over yonder. The son, not the cat.

And, as we learned from the S&L crisis, a good REO manager SHOULD be emotionally committed to getting the home sold and off the inventory of nonperforming assets.

Real Estate Broker 00849905
400 Montgomery 505
San Francisco CA 94104
Office: 415.781.3000
0 votes
De Vonte Wil…, Agent, East Point, GA
Thu Nov 15, 2012
When you buy a foreclosure from the Bank it is already Bank Owned (The Bank owns it). When the foreclosure process is pending, and you are buying it from the Seller while the property is on the market, it is usually a Short Sale situation (Where the bank agrees to take a loss on the property) however, the Homeowner still owns it. I hope this helped...

I hope this answered your question! If you have any further questions, please feel free to contact me by the ways below.

Wishing you all the best,

De Vonte Williamson , LSA
Proudly Serving Long Island
Coldwell Banker Residential
"I Stand Behind Getting You Results!
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