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The investor's guide to buying bank owned properties
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The Investor’s Guide to Buying Bank Owned Properties

Real estate investor investors may soon see more bank owned properties for sale. This third quarter saw around 25,000 new foreclosures across the country.

Pandemic-related mortgage bailouts are ending. This resulted in new foreclosures increasing by 67% in the third quarter compared to the same period last year. The top five states that had the largest number of new foreclosures were California, Texas, Florida, New York, and Illinois. While this increase is dramatic, experts say that this is still relatively low as new foreclosures were around 40,000 per month before the pandemic.

This may be a terrible time for homeowners who defaulted on their mortgages. But real estate investors see this as an opportunity to buy a new income property at a discount. If you are like these savvy investors, consider looking into bank-owned properties. These are foreclosures that mortgage lenders failed to sell in a public auction.

In this article, you will learn how to buy a bank-owned property. This guide also includes:

  • An in-depth definition of bank-owned properties
  • The difference between bank-owned and foreclosed homes
  • Pros and cons of buying a bank-owned property

Related: Buying a Bank Owned Home for Investment: Pros & Cons

Bank Owned Properties, Defined

A bank-owned property is a home or another property type that the foreclosing lender failed to sell during the public auction. It is also known as a real estate-owned (REO) property. A house may also become an REO if the homeowner agrees to a deed-in-lieu of foreclosure. When this happens, the lender would then add it into their inventory and try to sell it to recoup their losses from the failed mortgage payments.

Before it becomes a bank-owned property, the house must first be repossessed by the lender when its respective homeowner defaults on their mortgage. The lender has a certain grace period for missed payments, usually 120 days, before they officially start the foreclosure process.

Property investors prefer to buy these homes as they tend to sell at discounted prices and have low interest rates and low down payments compared to standard houses that are for sale. However, the process usually takes longer to finalize. Buyers must also be careful of potential repairs that they might need to spend on.

You can usually find listings of bank-owned properties through online services like Mashvisor or directly on lenders’ websites. Lenders that have these properties for sale could be a bank, a credit union, or another financial institution that offers loans such as mortgages.

Difference Between Bank Owned and Foreclosure Properties

If this is your first time delving into the real estate market, you may find different types of properties during your search. Two of them are foreclosures and bank owned properties. They may look the same at first glance, but they actually differ from each other.

What Is a Foreclosure?

A foreclosure is controlled by the lender after the homeowner has fallen so far behind with their mortgage payments, so turning over their home is their only solution to their pressing debt.

When the lender acquires the property, they are now the de-facto owner and must then prepare the house for public auction. When the foreclosure is up for auction, prospective buyers may not be able to inspect the property. These homes are sold as-is regardless of their condition.

Related: REO vs Foreclosure: What’s the Difference? 

How Is a Bank-Owned Property Different From a Foreclosure?

A foreclosure becomes a bank-owned property in one of two ways:

  • The homeowner agrees to a deed-in-lieu of foreclosure, in which the lender makes the property part of their assets; or,
  • The lender fails to sell the foreclosed property at the public auction.

In this stage, the lender uses traditional marketing channels and involves realtors and brokers to dispose of these homes. Unlike in the public auction, you may be able to have the bank-owned property appraised or inspected before making an offer.

Pros and Cons of Buying Bank Owned Properties

While buying bank-owned properties may seem cheaper, you still need to be aware of the risks involved when buying such homes before you decide on whether to do it.

Pros of Buying a Bank-Owned Property

  1. Lenders are motivated to sell.

The lender who owns the bank-owned property does not want to keep it in their asset portfolio for a long time. You are thus likely to have more leverage in the negotiations, which could help you secure better terms.

  1. The price will likely be competitive.

Because the lender is very motivated to sell, they will price the bank-owned property below market value. If you are in a hot housing market, you will not have to worry about inflated prices when you can buy this type of property.

  1. Homeowners are not involved.

If you have been in a real estate transaction with a homeowner before, you would know that they tend to have an emotional attachment to their house. This could make negotiations challenging. But with a bank-owned property, you are now dealing with the lender, who only wants to dispose of the home and recover their losses.

Cons of Buying a Bank-Owned Property

  1. Bank-owned properties are sold as-is.

Because the lender is attempting to minimize their losses, they will not invest anything to fix up the property before they sell it. Fortunately, you may request to get an appraisal or inspection before committing to your purchase.

  1. You might encounter other hidden costs.

Another costly issue that you may discover is a lien against the house. To protect yourself, run a title search and buy title insurance. If you find existing liens, you could hire a real estate lawyer to clear this up.

  1. You may still encounter heavy competition.

Whether you are buying a house at an auction or directly from a bank, expect to have other prospective buyers competing against you. After all, you are not the only property investor out there. If you noticed that a certain bank-owned property has big income potential, others are likely to have discovered that as well.

How to Buy a Bank-Owned Property

Because bank owned properties can be great deals for investors like you, you should learn what the process will be like when buying one. Here are the steps to buying a bank-owned property:

Step 1: Get Pre-approved

It is best to get pre-approved for a loan first before beginning your search for bank-owned properties. And if you already found a house that you want to buy, you could try to get pre-approved by the lender that is selling it to make the transaction run smoothly.

By getting pre-qualified before looking for a property, you will already know how much you can afford. You could also know your limitations sooner. For example, most lenders deny mortgage applications for homes that are in terrible condition.

Make sure to shop around and find the best lender that can offer the best price and terms that meet your needs.

Step 2: Search for Bank Owned Properties

Once you know the price range you can afford, you can now start looking for houses. Here are some tips on how to find bank owned properties:

  1. Bank websites

Financial institutions that offer home loans are most likely to have bank-owned properties listed on their website. When searching, look for links that mention words like “Foreclosures”, “REO”, and “Bank Owned Homes”.

  1. MLS

MLS, or Multiple Listing Service, is a national database that connects real estate buyers, sellers, and brokers. Using this tool, you can filter your search to only display bank-owned homes.

  1. Mashvisor Property Marketplace

Mashvisor is an online platform that specializes in detailed analytics on house listings and neighborhoods. In 15 minutes or less, you can find foreclosures and other specific types of property that meet your criteria by using our search filters.

You will not only see the foreclosed home’s asking price and description, but you will also find our stat-of-the-art investment property calculator. You can use this feature to analyze your potential return on investment in a house. And when you find a home that you want to look into, you can use our website to connect directly with the property owner so you can start your negotiation.

Step 3: Hire a Buyer’s Agent (Optional)

While hiring a buyer’s agent for bank owned properties is not essential, it might save you some time and stress when you have someone transacting with the lender on your behalf. They are especially useful if this is your first time buying such a home, and they have a fiduciary responsibility to advocate for your best interests.

Do not worry if you cannot afford to hire one; it is the seller’s responsibility to pay for their service. If you decide to employ a buyer’s agent, make sure that you work with someone who has experience in dealing with bank-owned properties.

Step 4: Do an Appraisal and Inspection

Just because bank owned properties are sold for cheap does not automatically make them bargains. Some of them are discounted because of severe damage or unpleasant location, while others that are in good condition may not even sell at below market value.

To ensure that you are paying at or below the home’s true market value, get an independent appraisal. At the same time, hiring a professional to inspect the property can let you know of its current condition, as bank-owned properties are sold as-is and do not come with warranties of any sort.

Getting an appraisal and inspection done before making an offer is atypical in real estate transactions. But doing this can put you in a better negotiating position, which could save you a lot of money in the end.

Step 5: Make an Offer

Once you have found the property you wish to buy, it is time to make an offer to the bank. Do not try to lowball them, or they will reject your offer outright and move on to the next prospective buyer.

If they accept your offer, you will sign a contract with them and transfer the ownership. Upon signing, they might require you to pay an earnest money deposit upfront, which is 1% to 2% of the purchase price, and will hold it in an escrow account until the sale is complete.

The property banks usually clear their foreclosures’ titles before listing them but do not assume this will happen all the time. To protect yourself from other hidden costs, hire a title company that will run a full, insured title search for any existing encumbrances. Also, consider getting a real estate lawyer to help you clear any liens that you find.

Step 7: Finalize Your Financing

If your credit is good, you should be able to get full approval for your loan. Note that some lenders require a 10% down payment if you are going to use the home as a rental investment property.

Find Great Deals on Bank Owned Properties at Mashvisor

A bank-owned property has completed the foreclosure process. If the mortgage lender that foreclosed the home fails to sell it at a public auction, they must dispose of it with the help of realtors and brokers.

Unlike foreclosures, which you have to bid for at a public auction and cannot inspect beforehand, you may be able to get a bank-owned property appraised before making an offer. Even though bank-owned properties may be sold at competitive prices, you must still be wary and inspect the property and its title thoroughly or you may end up with costly issues.

When buying a bank-owned property, you need to:

  1. Get pre-approved
  2. Search for bank owned properties
  3. Hire a buyer’s agent (optional)
  4. Do an appraisal and inspection
  5. Make an offer
  6. Order a title search
  7. Finalize your financing to close the deal

Just keep in mind that you need to close the transaction within a set deadline or else the bank you are dealing with may charge you a penalty for each day you miss. But be warned: it may take them days or even weeks to respond, so schedule whatever you can–such as financing and inspections–as soon as possible to avoid delays.

When you are ready, you can use Mashvisor to search for a bank-owned property without leaving your home. Learn more about our product here.

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Ramonelle Lyerla

Ramonelle Zaragoza is a Content Manager for Mashvisor. She helps property investors and first-time homebuyers and sellers learn more about the US real estate market with in-depth research and easy-to-understand articles.

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