Should We Buy a Bank Owned Home or a Regular Home?
The Ins and Outs of Buying a House From the Bank
Question: Should we buy a bank-owned home or a regular home?
A reader asks: Are we candidates to buy a house from the bank? My wife and I are first-time homebuyers. In our city, we see a lot of homes for sale that are bank-owned homes. We talked with an agent at an open house who told us it is just as easy to buy a bank-owned home as a regular home. But our friends say no, buying a bank-owned home can be a nightmare. Is the agent lying to us? Which is easier to buy? Should we buy a bank-owned home or a regular home?
Answer: Some real estate agents who list real estate-owned homes, or REO for short, probably believe that buying a bank-owned home is just as easy as a regular home. That's because, for many of them, bank-owned homes are the only homes they sell. By far and large, I'd rather sell a regular home any day of the week, and I'll tell you why.
Bank-Owned Homes and the Market
It makes a difference as to whether the number of homes on the market are mostly foreclosures. If a regular seller is selling in a market dominated by bank-owned homes, regular sellers need to compete on price with foreclosures, meaning that seller needs to price a home in line with the prices of bank-owned homes.
Some asset managers, who work in bank real estate departments handling foreclosures, insist that their agents market their inventory just like any other home; some prefer the agents not to disclose that the homes are foreclosures.
That's because foreclosure homes carry a stigma. In all fairness to the bank, though, the bank is simply trying to compete in the open marketplace.
Bank-Owned Homes and Disclosures
Typically, when you buy a home, the owners know can share details with you about its history. You can find out whether the kitchen sink ever backs up, when the roof was last replaced and if there are any defects that a home inspection might not reveal.
When you buy a bank-owned home, you're on your own. You're buying an unknown factor with very little recourse.
Banks rarely make repairs to homes in their portfolios. They generally don't pay for a pest inspection or give buyers a roof certification or sewer inspection. If your home inspection discloses a major problem and you submit a request for repair, the bank most likely will ignore it. Whereas a regular seller is much more likely to negotiate a repair request and fix problems for you.
Negotiating to Buy a Home From the Bank
Some banks won't even look at an offer unless the buyer submits a mortgage preapproval letter from the bank's chosen lender, which means it can take even longer to submit an offer in the first place. Due to the volume of listings asset departments handle, it can sometimes take up to two weeks or longer to get a response.
When the bank does accept an offer, it often generates a bank addendum that, for all practical purposes, replaces the offer you submitted. The bank addendum can consist of 10 pages or more. Almost every important item that protects the buyer is altered. If you're buying a bank-owned home, it is a good idea to have your lawyer review the contract because the verbiage is sometimes difficult to understand.
Banks Charge Fees for Closing Delays
In northern California where I work, we often end up with a southern California escrow company handling the transaction. The distance delays paperwork. In addition, if the buyer's lender needs a couple of days to release the file from underwriting, the bank often charges the buyer a fee. Regular sellers are generally more forgiving and relaxed about extensions.
At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.