A foreclosed property is a home that is owned by a bank. A foreclosure happens when the homeowner defaults on their mortgage loan. There are three stages of a foreclosure. The first is the pre-foreclosure stage. This is where the homeowner falls behind on their mortgage payments and they are issued a formal notice that their mortgage servicer has begun the foreclosure process. Prior to a foreclosure being completed, the homeowner can sell the property. If there is no equity in the property, the house could be sold as a short sale. The second stage of a foreclosure is when the home is sent to auction. At an auction, the highest bidder may purchase the house. The bank which holds the mortgage may also bid on the property. If the house is not sold at auction, the bank by default takes ownership of the home. The final stage of a foreclosure is when the bank that owns the property puts the house up for sale through a real estate agent, or the bank may try to sell the property directly to the public.
There are many benefits to purchasing a bank-owned property. The most obvious of these is the property may be offered at a lower price than other similar properties. The longer a bank holds onto a repossessed property, the more money they will lose. Due to this, a bank will want to try and sell any repossessed properties as quickly as possible. The bank’s goal is to sell their properties as soon as possible to minimize their loss. Although bidding on a bank-owned property will require patience, it is often easier to negotiate with the bank, than an individual owner. This is because a bank has no emotional attachment to a property, were as a homeowner may have sentimental value attached to the house. Because of this, the bank will usually make decisions based strictly off of the home’s value. Another benefit to purchasing a bank owned property is that they are vacant. When you buy a home from an individual, there is usually a waiting period after the closing date to take possession of the house. When purchasing a bank owned property, a buyer will likely obtain the keys to the property, the same day the house transfers into their name.
There are drawbacks to purchasing a bank-owned property. These include the time that may be required to close on the property and the fact that bank-owned properties are typically sold “as is”. Patience is needed if you’re going to purchase a bank-owned property, because the bank will not allow the property to transfer until the title has been cleared of all liens. Most real estate agents will tell perspective buyers of bank-owned properties, “buyer beware”. What this means is some bank owned properties have been vacant for months or even years. Because of their vacancy, they may have unseen damage. The damage may include any and all functions of the house (plumbing, heating, electrical, gas), or possibly severe damage (structural). It is in your best interest to hire a general contractor or professional home inspector to inspect the property thoroughly, before entering into a purchase agreement.
Most bank-owned properties have been winterized because they have typically been vacant for long periods of time. Due to this fact, and that selling banks typically will not do repairs to their properties, potential homebuyers should either have cash or have been pre-approved for a rehabilitation loan. One of the most common rehabilitation loans is the FHA 203K. If you’re looking to purchase a bank-owned property and cannot pay cash, contact a reputable lender who is knowledgeable with the FHA 203K loan product.