Oh, the controversy that surrounds Bank Owned Properties (otherwise known as REOs, distressed property or foreclosures). At the point of foreclosure, you would think the transaction might be simple, but usually what you think should be simple, usually is not.
Controversy has to be expected when a bank has to foreclose on unhappy people who couldn’t (or today, may have chose not to) keep up with their loan payments and have to be evicted from their homes. And then the bank becomes the property owner (banks owning properties — eek) and attempts to resell it to someone very happy because hypothetically, they should be purchasing it for a price well below market value. And I haven’t even touched on the paperwork and back and forth that goes on during these transactions, but my point is these things are steeped in controversy inherently – at every single turn in fact.
Throw in the minor (sense my sarcasm) fact that there are hundreds of thousands of these foreclosures throughout the country and the potential for controversy, torment, confusion and fraud grow. Now since this post is all about whether you should or shouldn’t buy one of these properties, I won’t even go into the upheaval that has caused banks to put the total brakes on foreclosures. It’s just another sign that banks really shouldn’t be homeowners – but we’re here – so now lets make the best of it. So what’s the best of it? Buying a foreclosed home. Period.
What do I mean by that? Well, if you’ve heard of a short sale you might understand. The banks should love short sales and they should want to complete them left and right. Because short sales prevent banks from being property owners and they lose less money in a short sale. But what did I say before about things seeming simple that end up being not. Yah, exactly.
In a short sale, the current owner’s loan is typically more than what the house is worth today and the person’s payments may be so high due to increased percentage rates, they probably can’t afford it. So instead of waiting for the bank to foreclose on them, the owner contacts a realtor to initiate a short sale (it’s a joke that they are called short, because they aren’t). The owner and realtor find a price that is somewhere close to market value and the selling ensues. But lenders (not the owners) make up the primary part in this equation – and often, there can be more then one. Each lender who holds a note on the property need to be consulted on whether they will settle for much less then the loan, and in some cases nothing. You can imagine, with all the parties involved(buyers, sellers, realtors, banks) including negotiators, paperwork and humans in general – there are just too many ways for this to go wrong. And I haven’t even mentioned possible title and tenant issues.
Right here, I want to assure everyone short sales get completed everyday and there can be great opportunities for buyers in short sales. Success in short sales (just like most real estate transactions) comes down to realtors who truly understand the process, have their eye on the ball and lot of patience by everyone involved. That being said, they are still draining. I’ve heard of buyers waiting a year to close.
This is why buying a foreclosed home – a completely foreclosed home makes a lot of sense. At this point, you no longer have to contend with the past owner’s loans, tenants or title problems. What’s left is a home ready to be purchased.
Don’t get me wrong, there are still complexities in purchasing a foreclosure as you are dealing with the bank as the seller, but at this point, it’s mostly a matter of making intelligent and educated decisions just as if you would if you were buying a home from an owner. That means not being overly anxious to buy just because it’s an insane deal, understanding the market and comparable properties, being approved for a loan by a reputable lender, getting all the appropriate inspections so you understand what is wrong with the home and how much repairs could be(often foreclosed homes are sold as is). And the good news here is you’re not going to have to figure all these things our alone. Your realtor should be looking our for you and be able to provide you with the information you need to make smart moves or be able to refer you to a number of other professionals that will help you make smart moves. For ethical and professional realtors, the job is more than commissions – it’s about feeling good about doing the right thing for your clients.
So should you buy bank owned properties? The answer is yes, definitely if the home is right for you, the deal is right for you and you have someone experienced guiding you. 93% of the time, when these elements are in place, very little should go wrong.