By Leonard Baron MBA, CPA, San Diego State University Lecturer and Wendy Mihm, founder of FinancialRx.com – July 18, 2011
“Bank owned home sales” seems to be a topic that keeps cropping up all over the news lately. But what does that term actually mean and how does it impact you if you’re interested in buying real estate?
Definition of a Bank Owned Home
A bank owned home sale is very unfortunate for the existing (soon to be “former”) homeowner, and it occurs when the bank has foreclosed upon the property and taken ownership of the home. These situations are commonly called “foreclosures” or “Real Estate Owned” sales (REOs). The bank owned homes will be processed through the bank’s system, and an agreement will be made to sell it with a local real estate sales professional. That professional will list the home for sale on the local area Multiple Listing Service (MLS), so that any real estate agent may bring an offer on behalf of their client to purchase the property.
Things To Beware of When You Buy Foreclosed Homes
Now the property joins the MLS pool with all the traditional listings that have for sale signs in the front yard. There is nothing wrong with buying a bank owned home. Sure, the home may be in bad shape or damaged by the prior owner, but it could also be in fine shape or only need a little bit of work. So as an individual interested in buying real estate, you should do your due diligence on these, just as you would with any other property, with perhaps just a little extra caution. There’s always the possibility that the financial distress that led to the foreclosure also led to some neglect of the property.
CAUTION: There Is One Big Difference When Buying a Foreclosed Home
Now, in California and many other states, there is a big difference when you buy foreclosure homes. With a traditional sale, even if they are selling it as-is, they still need to disclose any known defects with the property – like a slab crack or unpermitted additions. Bank owned homes, since the bank has never occupied it, do not come with the disclosure – commonly called at Transfer Disclosure Statement (TDS) – because the bank doesn’t really have knowledge of any issues.
So you are truly taking the house AS IS. And while there may be issues with the property, a little caution up front can help reduce your risk.
Mitigate Your Biggest Risks
First, of course, have a home inspector look at the property and prepare a report on his or her findings. Next, check with the county for any code violations or known defects. And if it is in a Common Interest Development (HOA), you can also check with them for any issues.
And as with any property, once you have it under contract, you should also check the title report for issues, a Natural Hazard Disclosure Report (NHD) for flood plains, earthquake zones, chemical contamination, etc. You can also check and with the insurance company for past insurance claims. There are several other checks and reports you can get – talk to your real estate professional about these, and work with them to determine what you need.
The biggest risk you face is the condition of the property. So if it needs work, just make sure you get some bids from contractors, don’t take your own guess or a non-professional’s advice on what the repairs will cost. Individuals typically under estimate the costs and time frame associated with renovating property by a lot! So be meticulous and take the time to really figure out the details up front. Then add a generous contingency, like 50%+ to your estimates.
That 50% covers all the items you didn’t think about when you were considering the purchase, but now that you own it, you’ve decided you’d like to add all kinds of extra details “now we’re having work done…”
Buying foreclosures can be just a good as traditional home sales, just make sure you understand the true condition of the property, and do the proper due diligence up front.
Now go help the economy by purchasing your dream bank owned home!
Author Leonard P. Baron, MBA, CPA, is a real estate lecturer at San Diego State University, a long term residential real estate investor and author of Real Estate Ownership, Investment and Due Diligence 101 – A Smarter Way to Buy Real Estate.
You can learn more about him and get his free – “Real Estate Buying Due Diligence Checklist” at professorbaron.com – under Chapter 1 – Due Diligence (no sign up or registration needed, just download it for free!)