By Jim AkinWhat Are Bank-Owned Properties?
A bank-owned property, also known as a real estate-owned (REO) property, is a home that becomes the property of a bank after a mortgage borrower fails to make their payments. Bank-owned properties are available for purchase, often at bargain prices, but often require significant refurbishment or repair. A bank-owned property can be a good opportunity as an investment or primary residence, but only if you're willing to take on considerable risk.
What Are Bank-Owned Properties?
A property becomes bank-owned when the mortgage borrower fails to make their payments for a period of several months. These properties return to the bank voluntarily or involuntarily depending on the situation.
Banks sometimes take ownership of a home when a borrower who's unable to cover their mortgage turns the property over voluntarily. This process, known as deed in lieu of foreclosure, can be as damaging as a foreclosure to the borrower's credit scores, but may allow them to get a "cash for keys" stipend in return for leaving the property in good condition and vacating by an agreed-upon deadline.
More commonly, property becomes bank-owned after it is seized in a foreclosure, then fails to sell at a foreclosure auction. Procedures differ by state, but in many jurisdictions the lender makes the opening bid for each foreclosed property, typically for the amount they are owed on the home. If other potential buyers consider that sum too high, there are no additional bids and the lender keeps the property and offers it for sale.
Bank-owned properties may be available for sale at less than market value, but buying one carries significant risk, and the purchase process differs somewhat from a regular home sale.
Pros and Cons of Buying a Bank-Owned Property
Buying a bank-owned property can have its benefits, but there are some drawbacks to consider.
Pros
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Lower prices: Generally speaking, lending institutions such as banks and credit unions don't want to be property owners, so they are often motivated to sell property they own at favorable prices.
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Unencumbered title: The foreclosure process eliminates the primary mortgage and strips away any secondary ones, such as home equity loans and home equity lines of credit (HELOCs). And when a bank takes possession of an unsold foreclosure, it typically pays outstanding property taxes to simplify the resale process, so you'll avoid those potentially costly headaches that can complicate home sales.
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Potential for financing: Buying a home in a foreclosure auction typically requires paying cash, but you may be able to finance the purchase of a bank-owned property. The institution selling the property might even consider issuing a mortgage on it. If you plan to make the property your primary residence, you also may qualify for a federally backed Federal Housing Administration (FHA) 203(k) mortgage, which can be used to purchase a home and to cover repairs or renovations on it.
Cons
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Repair costs may not be known: Bank-owned properties are usually sold "as is," and lenders aren't legally obligated to disclose defects or other issues the way an owner-occupant would be when selling the home. While you can (and should) pay for a property inspection before purchasing a bank-owned home, the full extent of necessary repairs and related costs can't be known for sure until after purchase.
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Stiff competition: Experienced investors know bank-owned properties can be bargains, so competition for plum properties can be keen. Some of your rivals may be prepared to make all-cash offers, so if you're not in a position to do so, it's important to have your financing squared away before you make an offer.
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Closing can be lengthy and costly: Lenders often hire third-party companies to manage the sale of property they own, and these REO servicers typically must get approval from the lender at every stage of the sales process. The extra layer of approvals can add to the time required to finalize a sale. In addition, lenders typically are unwilling to share closing costs with buyers, the way some private sellers might, so you should expect to pay all origination fees on the loan, legal fees and other related closing costs yourself.
Should You Buy a Bank-Owned Property?
You can get a great deal on a home by purchasing a bank-owned property, but the process can be time-consuming and there's a good chance repairs will eat into your savings. So you need to be prepared to do the work yourself or farm it out to contractors you trust.
If you have the time, the means or the personal ability to have repairs made, and a greater appetite for risk than the traditional real estate buyer, a bank-owned property could be a great opportunity.
Where to Find Bank-Owned Properties
Bank-owned properties are widely available and can be identified using the following resources:
- Online real estate portals: Sites such as Realtor.com, Redfin and Zillow enable you to search for REO properties listed by state or region.
- Lender websites: Banks that operate in the area where you wish to buy property, including national commercial banks, may list bank-owned properties they have for sale.
- Federal websites: In its capacity as an issuer of home loans, the U.S. Department of Housing and Urban Development (HUD) acquires a significant number of foreclosed homes and lists those available for sale at HudHomeStore.gov. Fannie Mae bank-owned properties can be found at HomePath.com and those acquired through foreclosure on Freddie Mac-backed mortgages are listed at HomeSteps.com.
- Real estate agents: A real estate agent familiar with your local market for bank-owned properties may be able to keep watch for properties that suit your needs and alert you as they become available.
How to Buy a Bank-Owned Property
Purchasing a bank-owned property isn't vastly different from buying a home the traditional way, but there are a few nuances to keep in mind. Take these steps to buy a bank-owned property:
1. Secure Financing
Getting preapproval from one or more mortgage lenders gives you a solid idea of how much you can spend and shows the sellers that you're ready and able to move forward with a purchase.
2. Find a Real Estate Agent
Look for an agent who's experienced with sales of bank-owned properties. This may take some digging, but their experience will pay off in a smoother, more hassle-free process for you.
3. Find a Home You Want to Buy
Working with your real estate agent, find a home that's within your budget, taking necessary repairs and renovations into account. Make sure the home is priced comparably with other homes in the area.
4. Make an Offer
In consultation with your real estate agent, decide how much you're willing to spend on the property and submit an offer letter, with a check for earnest money as appropriate in your location.
5. Get an Appraisal and Inspection
When purchasing a bank-owned property, it's important to get a home inspection. While you can't use an inspection to list repairs you want the seller to make, you should factor any issues raised in the inspection into your offer. If you are financing the purchase, your lender will likely require an appraisal to be conducted at your expense, so make arrangements as necessary with the bank to confirm they'll issue a loan on the property in question.
6. Perform a Title Search
A title search (and perhaps title insurance) are relatively inexpensive safeguards that can spare you from potential surprises in the form of liens against the property or even lawsuits from individuals claiming ownership.
6. Close the Sale
Work with your agent and a real estate attorney to review all necessary documents and complete the sale at an appointed time and place.
The Bottom Line
Purchasing bank-owned property isn't for everyone, owing to the uncertainty of a property's condition and the potential requirement that expensive repairs be made before the property can be occupied, rented out or resold. If you are willing to take on some risk, and to tackle (or fund) significant property improvements, a bank-owned property could be a real bargain.
Before you apply for a mortgage on a bank-owned property or a more conventional house, check your FICO® Score☉ for free from Experian to get a better idea of how favorably lenders will view your application. If necessary, take time to improve your credit score before beginning the process.
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About the author
Jim Akin
Jim Akin is freelance writer based in Connecticut. With experience as both a journalist and a marketing professional, his most recent focus has been in the area of consumer finance and credit scoring.
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