Foreclosure Property Basics: Part 1 (Finding them, viewing them, and what to expect making your offer)

Foreclosure properties have by far been the #1 inquiry I have received from many buyers in the market place today. People are interested in purchasing foreclosures for very good reason too, the owners are very motivated to sell, they are usually the most aggressively priced in the market, and they (unlike short sales) can be purchased in 30 days or less like a normal sale. There are unfortunately many misconceptions out there about exactly what a foreclosure is and what to expect when purchasing one. This is part 1 of 4 posts where I will discuss many of the ins and outs of foreclosures and what everything means to you, a buyer.

Finding foreclosures

When searching for Bank-Owned, Foreclosure deals the best way to find them is through a local agent. There are no special ways or places banks exclusively list their properties available. They are under obligation to their investors, shareholders, and federal regulators to obtain the highest and best price for their Real Estate Owned. They must expose their properties to the general market, and must sell them for the highest and best price they can attain within a reasonable period of time. This means ALL foreclosure properties are listed with a real estate agent before they are sold. They are available in the local MLS, Realtor.com, and countless other websites where homes are listed. You may have even come across a few listings that are bank owned and not even known it. Key words to look for are REO, Bank Owned, and Corporate Owned, but few sites allow you to search specifically for only Foreclosure properties.

What to expect when seeing foreclosures and when you bid on them

Now that you know where to find foreclosures, you should know when you view them and when putting in offers. For one, it is highly recommended that you employ the expertise of a buyer’s agent. Not just simply for the convenience of being able to check out multiple properties in a single day, but because your buyers agent should have the experience and expertise to structure your offers correctly, and accepted.

When checking out foreclosures, you will see a wide variety of condition each property will be in. Some can be in “move-in” condition, others maybe need paint and a carpet cleaning, but there is also a higher probability of them needing quite a bit of work. Sometimes by the time a bank has a property up for sale it has been months if not over a year since anyone has lived in the house. Musty smells are almost universal along with deferred maintenance. The more seriously damaged foreclosures occur from either frustrated owners, or thieves. Fans, light fixtures, door knobs, doors, closet shelving, appliances, a/c compressors, missing cabinets and holes in the walls can be common and easily seen. Other not so visible problems, for example, were a frustrated owner that decided to pour concrete mix into the homes toilets...... needless to say that home didn’t pass inspection. SO ALWAYS HIRE A REPUTABLE HOME INSPECTOR!

Another great reason to have a buyer’s agent on your side is because simply being a foreclosure home doesn’t mean it’s the best deal available! Banks are fallible as any seller is, sometimes they overprice their listings. There are also other properties that are not foreclosures that can be purchased at similar deals to foreclosures, including short-sales and plain motivated sellers that don’t owe much on their mortgage. Performing a CMA is critical to making sure you are getting the best deal available.

Placing your offer

The listing agents for the banks can be handling many tens if not hundreds of properties at any one time, needless to say they are quite busy. If you do not have a buyer’s agent you can expect delays and frustration getting a listing agent to open a property up for your viewing. You should also know that banks require offers be structured in a certain way, and will not even look at an offer that is not the way they require or that does not come accompanied with a pre-approval letter or proof of funds. Common requirements are for an as-is contract and a special offer summary sheet. Other non-common things like requiring a pre-qualification from one of their own loan officers, each bank is different and only an agent can find out how the bank likes their offers. Bottom line, Get your act together BEFORE you even look at your first property.

Once you have a correctly structured offer ready to submit to the bank, know that no matter how quick a deadline you give the bank to accept your offer, they will work as fast or as slow as they wish, the bank works on their own schedule. You can expect it to take anywhere from 1-3 business days to hear back on an offer. If there are multiple offers on the property expect to hear the bank asking for a final and best offer. In such a situation the bank will accept the highest and best offer and will NOT negotiate individually with each offer.
If you are lucky enough to have your offer accepted, there will always be an addendum to the contract sent from the bank for you to sign. The addendums are different for every bank and are mostly just “cover your butt” disclosures. The main point of the contract is to say we represent nothing about the house other than we are selling it to you, and that you better close on the property quickly or we’ll keep your deposit; make sure to review the addendum thoroughly and understand everything it says. It is also VERY common for a bank to ask for a quicker closing than you ask for, if you are financing the purchase, always give yourself at least 30 days to close. The bank would prefer a quicker closing, but likely won’t reject the deal just because you require the normal 30 days to close. Even after you send the bank the signed addendum it can take another two to three business days to receive a fully executed contract. I have never known a bank to go back on a verbal acceptance of an offer during this time, so you should feel confident scheduling your inspections and moving forward with your loan while you wait.

This is meant to be a general outline of what to expect during the search and offer stage when looking at foreclosure homes. Each home will be different with their own little hurdles to overcome. For your highest chance of success, seek the advice of an experienced buyer’s agent.

Part 2 of my foreclosure postings will discuss how banks set price and the difference between expecting a crazy deal vs. a good deal.