Why Banks Don't Always Deal With Buyers on Foreclosures
Buyers looking to buy repossessed homes may discover that some lenders will not sell the home to them and they don't know why. The truth is that lenders can name the terms and conditions under which they will sell a lender-owned home. If buyers don't fit those qualifications, they are out of luck.
Don't lenders want to get rid of their foreclosures? Aren't they happy to get an offer on a bank-owned home? The reality is that this isn't always the case. Here's why, along with why buying a bank-owned property with cash is the way to go.
Lenders May Frown on Multiple Offers on Foreclosures
Lenders have learned 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 doesn't have the financial means to purchase all the properties. Some state laws might hold the buyer liable for breach of contract on cancellation because the buyer may not have acted in good faith. It's also not a good move for buyers. If buyers don't closely look at and follow the terms of their contracts, they could end up contractually obligated to purchase multiple properties.
Plus, let's face it. Lenders want buyers to be committed to their purchase and to follow through on closing. If the lender has reason to believe the buyer is playing games, the bank will reject the purchase offer.
The Lender Thinks Your Financing Won't Go Through
If you don't have the cash on hand to buy a foreclosed home, you'll need to get financing. To do that, you'll need to apply for a mortgage and go through underwriting, which is the process lenders use to decide whether to approve your application.
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% down, however, will typically beat out an offer from a buyer obtaining a Federal Housing Administration (FHA) loan.
This is because some foreclosed homes may require too many repairs. Appraisers will note missing bathroom toilets and sinks, peeling paint on pre-1978 homes, and inoperable or missing kitchen appliances such as a stove. The FHA requires the satisfaction of appraisal conditions before closing.
The lenders that own foreclosed properties typically will not authorize repairs before closing; they want to sell as-is. This doesn't mean you can't buy an REO property with an FHA loan, but if you're competing with someone with cash or conventional financing, you may not make the cut.
Why Lenders Prefer Cash Buyers on Foreclosure Deals
Buyers with 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's unlikely the lender will consider an offer from any buyer who is relying on financing. Cash is king in this market for several reasons:
Cash buyers don't make offers contingent on an appraisal. Financed offers are contingent on appraisal, though. If the lender repossession doesn't appraise for the purchase price and the buyer is obtaining a loan that requires a 20% down payment or less, the buyer's lender will not fund it unless the buyer coughs up more cash or the REO lender discounts the price. That's unlikely to happen.
Loan Funding Contingency
REO lenders with cash buyers don't have to worry about the transaction closing. Lenders sometimes deny loans for pre-qualified buyers because the buyers' qualifications don't hold up under further scrutiny. Maybe the buyer wasn't fully employed in the same occupation for the past two years or their financial situations changed before closing. Or worse, maybe the buyer was unwittingly a victim of identity theft. In any case, unlike cash deals, financed deals can fall through during underwriting.
Buyers don't need 30 or 45 days to close if they aren't 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. Faster closings put money into the REO lender's pocket sooner, and fewer things can go wrong in a short escrow period.
Texas Realtors. "Ethics Q&A: Can a Buyer Make Multiple Offers?" Accessed April 4, 2020.
New York State Homes and Community Renewal. "SONYMA Credit and Property Underwriting Notes," Page 6. Accessed April 4, 2020.
Department of Housing and Urban Development. "Appendix D: Valuation Protocol," Page D-2. Accessed April 4, 2020.