So You Want to Buy a Bank-Owned Property?

Ah, yes.  Everybody wants a deal, right?  And of course, bank-owned properties are always a great deal!  I mean, that's what everybody says, right?  Not so fast, my friend...

Certainly bank-owed properties CAN be a good deal, depending on the circumstances.  I'm referring to foreclosed properties, NOT short-sales, otherwise know as "REO's," "corporate listings" or "repo's."  But there are some things you need to know before you decide to buy a bank-owned property.

1.  Not all bank-owned properties are equal.  Meaning they can be in any state of disrepair.  Some just need paint and carpet, some need a total rehab.  Are you up for doing a rehab on a property?  Do your research on what kind of time and investment you will have put into doing a rehab on property.  It is not for the faint of heart.

2.  Most, if not all banks require additional contract addenda.  They can be a few pages up to (30) pages. All of these addenda are designed to protect the bank, NOT you.  Be very careful when agreeing to language that is not "standard" for your area and is drafted by a bank.  There is language in bank addenda that can really get you in a bind if you don't understand what you are signing.  Consider getting an attorney for a bank-owned property.  Potentially, get an attorney for any transaction.

3.  There are different kinds of bank-owned properties.  Fannie Mae, Freddie Mac, traditional-bank, FHA (HUD) and VA.  How they are marketed and how they are purchased is different.  Understand exactly how the transaction works with that particular bank.  Each has different conditions and different terms, and some give you more/less financing options.

4.  Financing a bank-owned property can be a challenge.  If you are trying to buy a bank-owned property using standard FHA or VA financing you may have issues.  If a property has ANY major problems and/or some "medium" problems you may not be able to get financing.  Why?  Because the FHA and/or VA appraiser (and the underwriter) will require the home to be in mostly "good" condition.  If it is not, you can't get a loan for it.  All utilities have to be in working order, no water leaks, no roof leaks, no water problems in basement, no broken windows, etc.  FHA and VA are very picky, the are trying to protect you as a buyer.  However...

5.  Some FHA (HUD) homes can be purchased with an FHA loan no matter how bad the condition is.  HUD decides this when the appraise them.  So, if a HUD house is listed as "insured" or "insured with escrow"  it can be purchase with an FHA loan.  "With escrow" means that there are items that need to be fixed but they will allow you to "escrow" (set aside) additional money to do the repairs after you purchase the home.  Basically, they determine how much the repairs will be and they add that number to your mortgage amount.  Then after closing you have the repairs completed and they get paid for out of your escrow account.  Note:  if a HUD house is listed as "uninsured" it can only be purchased with "conventional" financing or with cash, no exceptions.

6. As I said, many bank-owned homes cannot be financed, even with conventional financing.  How can that be?  You mean they only accept cash?  Yes, this is true for some homes.  However, there is an exception.  If the house is in major disrepair you may be able to do a "rehab" loan in order to purchase it.  FHA has two of them:  203K and 203K Streamline.  There are also conventional rehab loan products out there.  If you are interested in something like this talk to your local lender or google "rehab loans."  They can be a bit tricky, are they are not for the fainthearted.  The terms and costs are different and the can be a bit complicated.  Do your research before you decide to go this route.  And no, you can't just "add money on the top" of a standard loan if a house needs work.  You may have to do a rehab loan or pay cash for it.

7. Bank-owned properties are "AS IS," which typically means "what you see is what you get."  It also normally means that the bank may not do any repairs on the property and it always means that there is NO PROPERTY DISCLOSURE so you may not know what you are getting into.  You will have to have a thorough inspection by a qualified inspector.  Once you buy a bank-owned home you are stuck if you find problems later.  You will not have any recourse against the bank if you find things wrong that were surely wrong before you bought it.  You are stuck.  With a normal seller you may not always have recourse if there are problems after the closing but sometimes you can get a remedy.  With a bank-owned property you are stuck, period.  And you will sign multiple documents stating that you understand this.  

Take your time, do your due-diligence and do your research if you want to buy a bank-owned property.  They are not for everybody, but they may be for you.

Happy hunting!                      

What is "As Is?"

So, the situation is that you want to buy a property and the seller says it's "as is."  What exactly does that mean?  Are you stuck with it if you find out something is wrong after the seller accepts your offer?  Will the seller negotiate any repairs?  Will the seller negotiate the price after the home inspection?  Does "as is" mean the property is in bad condition?  Does this mean there are problems that the seller doesn't want to disclose?

"As is" is very common these days, especially with sellers who have no equity and with the huge influx of bank-owned properties and short-sale properties.  Normally, you will see "as is" associated with bank-owned properties, short-sales, auction properties, sheriff sales, and estate sales.  If it's a "normal" sale the home will not usually be sold "as is."

Basically "as is" means this: the seller will not fix anything.

Does that mean you cannot have a home inspection?  No, it does not.  Keep in mind that the purchase contract always controls every transaction.  And while "as is" may be the way the property is sold, most sellers will still allow you to have a home inspection.  However, regardless of what your inspection determines, the seller will make no repairs.  Again, this is common with bank-owned properties, where the seller (the bank) doesn't want to mess with it.  That being said, most contracts include a clause that says that the buyer can get out of a sale if they find things wrong that they are not comfortable with, even if the property is listed "as is."

So, we know the seller wont make repairs, but will they lower the price?  Sometimes, it just depends.  This is an option, and banks can be open to dropping the price based on things that come up during the home inspection.  Sometimes they will negotiate, and sometimes they will not.  It really just depends.  But many times it worth trying.

Are "as is" properties always in bad shape?  No.  They can be, but just because a property is listed "as is" doesn't mean it's a total rehab.  Again, it just depends.  On things like an estate sale the family involved probably doesn't know anything about the property and just wants to get rid of it.  "Not knowing" doesn't mean it's in serious disrepair, it just means they don't know, and they don't want to deal with a laundry list of repairs.  Either you want it, or you don't.

On short-sales where the property is "as is" the seller has no money, and is upside down on their mortgage. The bank will not let the seller make repairs and the bank, who is directly involved in the short-sale, will also not make any repairs because the loan is already upside down and the bank is already in the hole for thousands of dollars.  They don't want to take another hit for repairs, they're already losing money.

"As is" doesn't necessarily mean the seller is hiding something.  Again, banks and estates rarely have any direct knowledge of the property.  Basically, they don't know about the condition and they don't care.  In some cases, the seller has to provide a property disclosure, in which the seller discloses what they know/don't know about the property.  These disclosures vary from state to state, and in general, banks and the like are not required to provide a property disclosure.  See my previous posting on seller's disclosure.

One last thing: if the property is "as is" because it IS in bad condition that makes buying it with a mortgage particularly challenging.  Many "as is" properties will only sell with cash or with a special financing program that takes into account the condition.  But that's a blog post for another day. 

I hope you are now an expert in "as is" properties.  Happy hunting!