Buying A Bank Owned Property

What you need to know...


It is a procedure by law; whereas 'real-property' is held as security for re-payment of a debt and is sold to pay the debt in the event of default. If the borrower defaults, the lender can begin the action of foreclosure. Note: Laws vary from state to state.

REO (Real Estate Owned):

After the foreclosure action is complete, the ownership of the home reverts back to the bank or lender. The home - collateral for the loan - becomes an asset on the bank/lender's books. This asset is referred to as 'Real Estate Owned' or REO.

Understanding the Seller

Lenders and mortgage banks are in the money lending business - not the real estate business. As such, when they take ownership of a property through foreclosure, their primary concern is disposing the asset (getting it off their books) as soon as possible.

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Understanding the REO Asset

  • Sold As-Is:
    Sold 'AS-IS' means just that! There are no warranties, guarantees, or representations.
  • Insurable vs. Marketable Title:
    Most banks offer 'insurable' not "marketable" title. In New York State, marketable title is usually defined as title free from “material” and “unreasonable” encumbrances, liens, judgments or defects. Insurable title, generally referrers to title a title insurer would insure without certain exceptions. It is important to understand the difference between the two. Speak with an attorney for more information.
  • NYS Transfer Tax:
    Most sellers (banks) require buyers pay to pay 'transfer tax' at closing. Rarely is this is a negotiable point. Note: Fannie Mae, Freddie Mac, SONYMA, and the VA are examples of institutions that are tax exempt.
  • Inspections
    Buyers are encouraged to complete inspections during the process of purchasing a bank owned property. However, as noted above, REO/bank owned properties are almost exclusively sold AS-IS. As a result, REO/bank owned sellers will rarely consider repairs, price renegotiations, or renegotiation of terms as a result of inspection results.
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    • Myth: The bank/lender wants to sell their foreclosed properties at 'rock bottom' prices.
      Fact: Once the bank/lender takes the property back through foreclosure, they are looking to recapture any and all loss. As a result fair market value is always the objective.

    • Myth: The bank/lender is only looking for the mortgage amount owed at foreclosure.
      Fact: The amount owed may not reflect items such as the principal, interest, late fees, attorney fees, insurance, property tax and preservation costs. Whether they profit or lose money, the bank/lender is always looking for 'fair market value' as determined by local real estate professionals, including licensed appraisers.

    • Myth: The bank/lender will fix up my house so it's up to code and in "repaired" condition.
      Fact: The bank/lender sells all REO properties in AS-IS condition. This includes selling subject to any recorded municipal violations, open / missing building permits and and/or missing certificates of occupancy.

    • Myth: The bank/lender will finance my REO property directly.
      Fact: Very few lenders are set up to offer REO financing. If financing or incentives are offered it is normally brought to the buyer's attention immediately.

  • Myth: If I pay cash, the bank will give me a better deal.
    Fact: Cash doesn't mean discount. Cash or mortgage; the bank/lender will realize the same net proceeds.
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What is fair market value and how is it determined?

he bank/lender normally involves at least two local real estate professionals in determining market value. The first is a real estate broker. The second is usually a certified appraiser. Both professionals complete detailed property reports, which include: interior/exterior photos (depicting condition), listing and comparables as well as an estimate of repairs needed. In addition, their report will include both as-is and as-repaired property values.

    • As-Is Value: This is the value the property will sell at in strictly as-is condition with no improvements, updating, repairs, etc..

  • Repaired Value: This is the value of the property in repaired condition after capital repairs, improvements and updating are completed.

Banks/lenders are no different than other sellers. Like you, they want the best terms, the best price and a quick closing.

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Foreclosure / REO Links

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