Why Banks Might Not Sell You That Repo
Buyers chasing bank repos are sadly discovering that some REO lenders will not sell a repo to them, and they don't know why. The truth is banks can name the terms and conditions under which they will sell a bank-owned home. If buyers don't fit those qualifications, they are out of luck.
Don't banks want to get rid their foreclosures? Aren't they happy to get an offer, especially a full-price offer on a bank-owned home? The reality is this is not always the case.
Buyers Who Submit Multiple Offers
Banks have learned that not every foreclosure buyer is committed. Some buyers make multiple offers with no intention of buying all of them. They want to pick and choose the best deal and, in doing so, could find themselves in court by writing bogus offers.
The problem arises when the buyer does not have the financial means to purchase all the properties. Some state laws might hold the buyer liable for breach of contract upon cancellation because the buyer may have breached an implied contract covenant of "good faith."
Plus, let's face it, banks want the buyer to be committed to the purchase and follow through on closing. If the bank has reason to believe the buyer is playing games, the bank will reject the purchase offer.
Some Homes Don't Qualify for Conventional Financing
Mortgage underwriters may turn down a loan from an otherwise qualified buyer if the property requires too much work to meet health and safety codes. A conventional buyer's offer with 20 percent down, however, will typically beat out an offer from a buyer obtaining a Federal Housing Administration (FHA) loan.
FHA Appraisal Conditions
FHA buyers might back away from buying the bank repo if the appraisal calls for conditions. While it is true that FHA appraiser guidelines have relaxed since 2006, foreclosed homes that are older may require too many repairs. Appraisers will note missing bathroom toilets and sinks, peeling paint on pre-1978 homes, inoperable or missing kitchen appliances such as a stove.
FHA requires satisfaction of appraisal conditions prior to closing. Yet, REO banks typically will not authorize repairs prior to closing. Then, toss into the mix that bank repo buyers rarely want to pay for repairs before they own the home. Streamline K loans also complicate the process and take longer to close, but they are a viable alternative when buying a fixer-upper.
Cash Buyers Preferred
Buyers with all cash are REO lenders' favorite purchasers. A list-price all-cash offer will beat out a conventional offer, even if the conventional offer is above list price. If the listing's conditions state "cash buyers only," it is unlikely the bank will consider an offer from any buyer who is relying on financing. Buyers should be prepared to show proof of funds in case the bank requires it, which rules out obtaining a refinance. Cash is king in this market for a number of reasons:
- No Appraisal Contingency: Cash buyers don't make offers contingent on an appraisal. If the bank repo does not appraise for the purchase price and the buyer is obtaining a loan that requires a 20 percent down payment or less, the buyer's lender will not fund unless the buyer coughs up more cash or the REO lender discounts the price.
- No Loan Funding Contingency: REO lenders with cash buyers don't have to worry about the transaction closing. Lenders often deny loans for pre-qualified buyers because the buyers' qualifications sometimes change upon further scrutiny. Maybe the buyer wasn't fully employed in the same occupation for the past two years, perhaps financial situations were altered prior to closing such as the buyer purchasing a new car or worse, maybe the buyer was unwittingly a victim of identity theft.
- Faster Closing: A buyer does not need 30 or 45 days to close if the buyer is not obtaining a loan. Once the home inspection and other contingencies have been satisfied or released, closing can take place in as little as three to seven days, providing the buyer is willing to sign a lead-based paint waiver. Faster closings put money into the REO lender's pocket sooner, and fewer things that can go wrong in a short escrow period.
At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.