Things to remember when purchasing a foreclosure

THINGS TO REMEMBER WHEN PURCHASING BANK OWNED PROPERTY

Purchasing bank owned property (foreclosures/REO) is handled, in most cases, like a typical real estate deal between private parties, but there are some things that you must keep in mind during this process which will make it go smoother for all parties.

OFFERS

Most banks will not accept letters of intent. If serious about purchasing the home take the time to prepare a formal offer, it will put the buyer in the best light to the seller.

Banks require pre-approval letters on all loan purchases, even those not contingent on financing. Lender pre-approval letters should include the type of loan and what was done to pre-approve the buyer, i.e., credit check, verified income, down payment source, employment.

Banks require Verification Of Funds for cash offers, i.e., bank letter showing enough funds available to purchaser property, copy of bank statement (black out account numbers)

Make offers as black and white as possible, because gray areas will only lead to a delay in responses. For example, limit “Seller to pay all buyers closing costs” to a dollar figure or percentage of the purchase price as the seller will not know how much closing costs will be. Make sure this amount is allowable under the buyer’s loan program before submitting the offer because the seller will not give the difference back to the buyer.

Completely prepare the sales contract. Seller should read as “Owner of Record”; include the property address, legal description if known (parcel ID will work if long legal), and include the loan type & LTV.

Most banks have required standard addendums, make sure you have read and fully understand them. Banks will not accept crossed through or marked out sections of the seller’s pre-printed addendums. Most addendums have a space to specify buyer’s wishes, and if not, include a hand written addendum and reference it in the contract.

Remember the condition of the property when writing the offer. If the buyer is getting a standard FHA, VA, or high LTV conventional loan, the condition of the property is very important. In most cases, if the house is not in average condition then underwriting will decline the loan. Consult the lender with what repairs are needed, to determine if the property will qualify for the type of loan being sought.

The bank already knows that the property may need some repairs and usually prices them accordingly. You may include a laundry list of items noted as being wrong with the property; however, the bank may not even look at it. Typically, banks have at least two Broker Price Opinions (BPO), noting obvious deficiencies with the property. This in no way implies that the bank has seen or inspected the property. The bank makes no warranties on the property.

The bank representative reviewing the offer will likely be handling 200 – 500 properties, and has no emotional attachment to the property. They will process your offer as quickly as they can. Do not expect quick replies. Typically it takes 24 to 72 hours to get a response (longer at the end of the month). Also the property may be transferred between people at the banks which also create more delays.

Contract / Inspections / Closing

Once accepted by the bank, you typically have 24 – 48 hours to turn everything into the listing company (local contract, addendums, pre-approval letter or verification of funds, & earnest money). Most banks require earnest money to be certified funds made to the closing agent, and this should be made known prior or at time of acceptance.

Most banks sell properties in AS-IS condition, even if they complete some repairs. They typically allow for inspections, but these inspections are for the knowledge and comfort of the purchaser. Do not expect the bank to make repairs or give concessions because of the inspection, especially on items easily seen when walking through the house, which is why they have agreed to the price that has been negotiated.

Most banks allow the buyer to perform inspections at the buyer’s expense. Utilities will be turned on if safe to do so. Usually the bank will not pay to have a meter placed in order for inspections. Typically the inspector must turn the water meter on and off after inspection. In winter months the properties are winterized (water systems drained) to prevent damage to the pipes, and the property must be re-winterized after inspections. The power company requires all breakers to be turned off, so once the power is on, the breakers must be turned on as well.

If inspections reveal any hidden concerns, these must be addressed as soon as possible to stay in the time line of the addendums and allow the seller time to get bids and/or make a decision. The seller will not make a decision with an open cost – a cap amount must be in place and in writing on an addendum.

Most of the standard addendums spell out time lines, these are very important to the banks and are taken very seriously. These time lines deal with everything from inspections to loan approval. If you see a delay coming, prepare an addendum ahead of time. Do not wait until the deadline is past as it will likely result in the seller declining the addendum.

Many banks have a per diem in the addendums to ensure everyone is working diligently to get the property closed. These per diems apply if the property does not close on time due to items on the buyer’s side. These delays can be for any reason, such as a survey or septic inspection ordered by the buyer, lender, or inspections. Verify that inspectors, lenders, etc., can meet the deadlines outlined in the addendums. Address foreseeable delays as quickly as possible; do not wait until the deadline or after.

If a loan is involved, make sure the lender knows that most sellers require 24-48 hours to review the HUD before signing. The lender must have a loan package to the closing agent 72 hours prior to closing. If the seller has not signed the HUD at time of closing, keys will not be given to the buyer and commission checks will not be issued. In most cases, the seller is not present at the closing. Do not wait until closing to try and make changes to the HUD, it will likely delay the closing.

Most banks have already ordered Title and will update it when they go under contract. Most banks will have a designated closing agent; if buyer wishes to use their own they will be responsible for this cost.

Most banks pay commission on the net sales amount. This is the sales price minus any buyer concessions (closing cost, down payment assistance). In many cases, the listing agent is receiving a lower commission, so do not put it in the contract that commission is to be split equally. Likewise, if the seller is offering a selling bonus, put this information into the offer to help insure you receive it as some sellers will negotiate it out if the offer is not acceptable with it.

All banks work differently and some of these points may or may not apply with individual banks. The above items should be used only as a guideline to prepare agents and buyers about purchasing bank owned properties.