Buying Bank Owned (REO)

Buying a bank owned property can be a great way to purchase a new home, and often below market value. The mortgage crisis has hit California, and the bay area in particular, very hard. The flood of foreclosures has led to the banks taking ownership of thousands of homes. Banks are very motivated to sell these homes and recoup some of their loss... they are not in the business of owning homes, they are in the business of financing homes. They want to sell these, and because there are so many to sell (high supply) and not enough buyers (low demand), this is the perfect opportunity for you to consider buying a bank owned home.

Advantages

There are several key advantages to buying a bank owned home. First, the purchase process is similar to a traditional transaction. This means the buyer is allowed to make the bank an offer at, above, or below the asking price. More importantly, the buyer can make the offer subject to inspection, appraisal, and financing of the home which we will discuss more below. You will also have peace of mind that the bank owns a clear title to the property. When you take title, you will know you are the only legal owner of the home.

The second key advantage is that the bank will almost always take less than market value for the home. Purchasing the right bank owned property below market value can lead to 'instant equity'. If similar homes in the same neighborhood are selling for more on average, your home may be worth more than you paid for it. You may be asking why a bank would sell for less than the home is worth. There are two main reasons: 1. they do not want to hold the home - they have many others and as mentioned earlier, they are simply not in the home buying/selling business. 2. bank owned homes may need repairs that the bank would rather not do themselves, so they want to sell it for less.

Disadvantages/Potential Pitfalls

There are two key potential disadvantages when buying a bank-owned property. The first is that a bank owned purchase is usually known to be an 'as-is' sale. That means the bank (seller) will not pay for any repairs or credit you the amount to make these repairs. You are buying the property in as-is condition. You are allowed to perform any and all inspections that you deem necessary, however, they are usually only for informational purposes. Of course, this all depends on the offer you write, and what the bank does and does not agree to.

The second potential disadvantage is bank owned purchases typically take longer than traditional sales. The bank only works Monday thru Friday 9am-5pm, unlike traditional sellers who are motivated to sell their home ASAP and work to close the escrow 24/7. As a result, you may need to extend your loan rate lock period, and/or delay the close of escrow due to the banks delays. Our experience with bank owned purchases helps our clients move through this process as quickly as possible. Our average transaction time for these homes is approximately 30-45 days.

There are other unique aspects of buying a bank owned property. We can review those with you in great detail when you decide to move forward. For example, banks are exempt from many of California's real estate disclosure laws and you will want to fully understand the implications of this before buying a bank owned home.

Buying Bank Owned - The Process

1. Get financing pre approval - banks will not consider offers without a formal pre-approval letter from your lender. Pre Qualification is not the same as Pre Approval.

2. Decide on a neighborhood. You can use our website to do this, or we can personally help you narrow it down based on your needs.

3. View 8-10 bank owned homes. Why so many? You will need to have several homes in mind when writing an offer. Competition for these homes among buyers is fierce so you may not get your first choice.

4. Decide on 1st, 2nd, and 3rd choice homes.

5. Write an 'AS IS' offer. Structure price and terms based on buyer competition. We are experts at helping our clients get the insight they need with the seller to negotiate the best possible terms for the offer.

6. Include deposit with offer. You will need to write a check for 1%-3% of the purchase price when submitting an offer. These funds must be available immediately as they will be placed into escrow if the offer is accepted by the bank.

7. Wait - and be patient! This can be the hardest part! Banks can often take 5-7 business days to respond. We will follow-up daily to expedite this response.

8. Receive counter-offer or bank addendum. The banks will almost always counter an offer, even if it just to include a standard bank addendum which further outlines the bank's terms of the sale.

9. If terms are acceptable, you will sign the counter-offer, the bank receives it and once they approve the final contract escrow will begin (could be another 3-5 business days).

10. Contingency time clock starts ticking. Inspections, appraisal, and financing are three standard contingences typically built into an offer to provide you with protection throughout the escrow.

11. Review inspection and appraisal reports. The inspection report will give you a sense of what repairs are necessary to the property, some of which may be required by your lender. In an 'as-is' sale, the inspection reports are for informational purposes only, which means you can not ask the bank for a credit to do the repairs. The appraisal report will tell you if the purchase price is more or less than the current market value of the home, which is an important data point for the lender and your final loan approval. Check out our inspection guide here.

12. Review and approve natural hazard reports, and HOA/CC&Rs if applicable. This is a standard part of any real estate purchase in California.

13. Remove all contingencies.

14. Review and sign any additional escrow documents (e.g. state/federal required disclosures). The Duggan Group provides a paperless signature option to clients which will significantly cut down the amount of time you will spend reviewing and signing paper documents.

15. Set title appointment. This is where you will sign all final documents, including lender/financing contracts. You will need to be prepared to decide on how you will take title on your new property. This is called vesting and is described further here.

16. Lender sends final loan documents into the title company.

17. Seller sends in HUD1 and grant deed to title.

18. Buyer signs all necessary documents at title/escrow appointment.

19. Buyer awaits seller approval.

20. Loan funds, escrow closes, property records in your name, you own the property!

This is meant to be a general guide to the process involved in purchasing a bank owned property. Obviously, every situation is different and every offer, bank, and escrow will also be different. Buying a bank owned property can be a great option for you, but it is important that you work with an agent that is very familiar with the process.

If you would like to get started, simply use our website to start searching for bank owned properties you would like to see, and click the request an appointment link at the bottom of the property page to send us an email with the details.

Or if you are not sure where to start, don't worry you're not alone. This may seem like a lot of information, but often times once you walk through it with us you will understand it much better. Just click the link below to contact us today and get started.