Buying bank owned homes is becoming an increasingly popular investment strategy with real estate investors in markets such as the Michigan housing market and the Florida housing market and even in major cities like Las Vegas, San Diego, and Chicago.
So, What Are Bank Owned Homes?
Also known as real estate owned (REO) properties, these are foreclosed homes whose ownership has shifted to the lender or bank. For a real estate investment to become bank-owned, it usually goes through these steps:
- Loan default – The borrower or homeowner defaults on their mortgage payment for a certain period.
- Foreclosure – The lender or bank undertakes legal proceedings against the homeowner to foreclose on the property.
- Auction – The home is put up for sale at a foreclosure auction. When someone opts for buying foreclosures from banks, the mortgage lender recoups some of the outstanding fees, interests, and loan balance from the sale.
- REO status – If the real estate property fails to sell at the auction, possession is automatically transferred to the bank and it becomes an REO home. The lender then makes arrangements to sell the property themselves, which could involve removing outstanding liens and evicting occupants.
The Benefits of Investing in Bank Owned Homes
Real estate investors and homeowners opt for buying a bank owned home for several reasons:
- No outstanding taxes to pay – In most cases, banks or lenders will waive outstanding liens or payments due on the property as a strategy for attracting buyers.
- No homeowners involved – When it comes to buying a bank owned home, you will be dealing directly with the bank. This saves you the trouble of negotiating with homeowners that are in legal trouble or emotionally attached to their property.
- Choice of requesting a home inspection – When homes are sold at foreclosure auctions, buyers don’t have the option of requesting a home inspection. This is not the case with bank owned homes for sale.
- Sold below market prices – Real estate owned properties are usually sold at discounted prices, with additional benefits such as low interest rates and low down payment. However, if the bank owned property needs a lot of repair work, it might end up being as costly as homeowner sold properties. This is why a proper home inspection is important before closing the sale.
How to Buy Bank Owned Homes
Here are 6 steps for anyone that wants to know how to buy bank owned homes:
1. Find available REOs for sale
The first step is to learn how to find bank owned homes available in your price range and target real estate market. There are several ways you can look for bank owned properties:
- Multiple Listing Services – Realtors and lenders regularly use the Multiple Listing Service to list bank owned properties.
- Lender and bank listings – Such bank owned homes listings specifically show all the available REO properties from a certain lender.
- Online services – Online services such as the Mashvisor Property Marketplace come with tools that buyers can use to not only find properties but also perform investment property analysis on them to ensure they make for good real estate investments.
2. Find a buyer’s agent
When it comes to how to buy bank owned homes, a real estate buyer’s agent can come in very handy for the process. The agent will ensure that you get great investment properties at competitive prices while guiding you through every step of the process. They will also advise you on whether to hire other professionals such as home inspectors and attorneys, depending on your situation and state.
If you want to buy bank owned properties, be sure to find a buyer’s real estate agent that has lots of experience working with bank owned properties. Such an agent will know the details involved in negotiating with the bank, how to work with the bank’s timeline, how to calculate repair and renovation costs, and how to anticipate what is coming next.
Related: Working with a Real Estate Agent: What Investors Should Expect
3. Narrow down your list
Once you find a buyer’s agent, you should then refine your list of bank owned properties. Some of the factors you need to consider include:
- Type of property (condo, single family home, multi family home)
- Listing price
- Location (and proximity to transport hubs, schools or other amenities)
- Number of bathrooms and bedrooms
- Repairs and renovations needed
- Quality of neighborhood
- Lender specific requirements and contingencies
- Community resources in the neighborhood such as houses of worship, gyms, and parks
Once you have written down your ‘must-have’ features, refine your list further based on additional ‘nice to have’ features such as a finished basement and a large yard.
4. Get a real estate appraisal
Though bank owned homes are usually sold at a discount, it does not necessarily mean that you are getting a good bargain. A bank owned property could be discounted due to reasons such as severe damage or being located in an undesirable neighborhood. Therefore, it would be advisable to get a real estate appraisal to find out the true value of the home compared to the asking price. The appraisal will involve checking the structural integrity of the investment property, taking inventory of major systems (such as plumbing and HVAC), and checking the prices of similar properties in the area (real estate comps).
However, it should be noted that an appraisal is not the same thing as a home inspection. While an appraisal attempts to estimate the real value of the home, a home inspection helps you identify the renovations and repairs needed.
5. Make an offer
Your buyer’s agent will advise you on how to make an acceptable offer and submit it to the lender. Besides submitting the offer paperwork, you might also be required to attach a money deposit check. This amount, usually 1-2% of the asking price, will be held in an escrow account until the end of the real estate transaction. When making an offer on a bank owned home, you can also be undertaking the home inspection process.
Related: Find Out How Much to Offer on Bank Owned Property
6. Close the deal
The last step in how to buy bank owned homes is closing. Once you have negotiated with the lender and agreed on a price, you might be required to sign a purchase addendum. Once the paperwork is done and the REO financing is in place, the deal can be closed. At this stage, you and a representative from the bank will sign paperwork to transfer the investment property to your name. You will then get the keys and become the new property owner!
Now that you know how to buy bank owned homes, where do you go from here? If you want to keep researching, you can check out these great tips: Buying REO Property: 8 Tips Investors Need to Follow.
Or if you’re ready to start your search and get the process underway, visit the Mashvisor Property Marketplace now.