Purchasing Bank Owned, Foreclosure and Short Sale Properties

A great deal has been written recently about the sale of Bank Owned or Foreclosed properties, as well as “Short Sales.” Buying such properties can certainly result in a significant savings in the purchase price. However, like any other purchase of a discounted item, there are certain pitfalls that you should be aware of. Again, there are many excellent “deals” out in the market, and so long as you are aware of some of the hidden traps, then you will be prepared to purchase a piece of real estate at a bargain price. The following is a partial list of issues that should be considered and understood before making an offer to purchase a Bank Owned property.

Usually the property is sold “as is.” This means that the Buyer is getting the property in whatever condition it happens to be in. Frequently the properties are in poor condition, as the owners cease maintenance upon learning of the impending foreclosure. REO/Bank Owned sellers are often reluctant to make any repairs to the property, too. Again, so long as you take the time to carefully inspect the property prior to making an offer, then you will be aware of any pending problems and can adjust your offer accordingly.

Title to property acquired through foreclosure, short sale, or REO may be subject to additional liens or judgments that need to be resolved and/or released prior to settlement. Clearing such titles can be challenging, and may result in a small delay in closing. Some liens may not even have been extinguished by the foreclosure process, such as IRS liens, some water bills, or liens and judgments with priority over the foreclosed mortgage instrument. Other delays may occur while waiting for the final order of ratification from the court, Lender approvals or short sale approvals. These delays, when anticipated, should not preclude you from buying a Bank owned property. One simply has to assume that the time period between contract and purchase may be a bit longer than normal and the Buyer should plan accordingly. Also, Buyer’s should be careful to insure that their loan interest rate lock does not expire, and other plans, such as renovations should be carefully scheduled.

If you are an investor intending to resell soon after the purchase, be aware of the FHA requirement that the property cannot be resold for a specified time period (“seasoning”). This is done in order to prevent “flipping” of the property.

When purchasing a property that is in a “short sale,” there is the possibility that the Lender will not approve of the sale. In a short sale, the Lender understands that they may not receive 100% of what is owed on the loan. Therefore, the Lender wants to carefully review the entire transaction before determining if they will allow the sale. This process can also lead to delays in settlement.

Often the Bank will have an affiliated or preferred settlement company to conduct the settlement. This company receives many settlements from the Bank and usually works for or on behalf of the Bank. In order to motivate the Buyer to settle with the Bank’s preferred settlement company, the Bank will often agree to pay some of the fees. However, you should carefully compare all of the settlement fees being charged because often the “savings” is lost when other settlement charges are higher than what you could obtain had you shopped around. In fact, with the “FREE” settlement coupon located HERE, you will be in a position to select your own settlement attorney and you will likely save on the other settlement fees as well.