Buying a Bank Owned Home
Buying a bank owned home is a solid opportunity for an investor or a homebuyer to obtain a quality property for a reduced price. Learning how to navigate the process – from creating an offer to negotiating with the bank – is the key to finding and obtaining a choice property for a significant discount.
Learning How to Buy Bank Owned Homes – The Offer
Creating a home purchase offer for a bank owned house is the first step after finding the right property and arriving at the decision to buy it. The offer is crucial; getting it right the first time can save a lot of time and effort.
When making the offer, you will put together something called a home offer letter. This is essentially a statement that contains the information the bank will need to evaluate, not just the price you are offering to pay, but also your ability to pay it.
Here are a few tips to assist you in the offer-writing process:
- Conduct a CMA: Having a comparative market analysis performed on your behalf can help you not only price the offer accordingly, but also show the bank the basis for your decision. A CMA can provide weight to your price so the seller sees on what you are basing your proposal.
- Provide proof of funds: You want the seller to take your offer seriously, and to do so, you will need to prove that you have the funds necessary to pay for the purchase.
- Be prepared: Know what will go into the total cost of the purchase, including closing costs, inspections, etc.
Also, a comparison between this particular property and other specific REO properties in the area will help.
Find the appropriate division, office, or official in the bank to submit your letter – this information is often found on a bank's website – and then be patient. It takes time to process an offer. After you receive confirmation from the bank, wait patiently and prepare your response in case the bank wants to negotiate.
When Will the Bank Respond to My Offer?
There is no hard and fast answer to how long it takes a bank to respond. Different banks have different timelines. If a bank is awash with bank owned real estate in a busy market, there may be a backlog. (Or, conversely, the bank may be extra willing to respond in a timely manner to move its property.)
In general, you can expect some kind of response between a few days to three weeks. If you tender a lower offer than the pre-approved price range established by the bank's asset management team, the time for approval will be longer since there will need to be additional communication between the bank and you. A higher offer than that range or within the range is more likely to be responded to in a quick manner – sometimes within 2-3 business days.
Also, offers that are wholly or mostly in cash tend to have a faster response time.
Expect some kind of response within a 2-3 business days of sending your offer. If you do not receive any kind of response at all, it is okay to send an email after three business days have passed since the bank would have received your letter.
Is a Pre-Approval or Proof of Funds Really Necessary?
Proving that you can afford to purchase a bank owned home is essential to making a successful offer. Bank owned properties tend to be available for below market value; as such, banks receive many offers on an ongoing basis from buyers looking to obtain property at a significant discount. Many of these offers are not realistic or feasible, and the bank wastes time following up on them.
Having proof of funds or pre-approval for a loan will make your offer much more credible. Since buying bank owned homes is competitive, this step can make your offer stand out.
Once My Offer Is Accepted, Will I Get a Signed Purchase Agreement?
Often, the bank will want to draw up and send to you its own purchase contract. This will typically contain addendums, particularly those pointing out how the purchase is an “as-is” sale, meaning you accept the home in its current condition and the bank is under no obligation to repair it. The bank will also say the purchase is contingent on sufficient funds, and may ask you to pre-qualify for one of its loans. You aren't, however, required to get a loan from the bank you are buying from in order to close a deal.
There will be several rounds of back-and-forth communication between you and the bank before the final contract is signed. Depending on your state, the bank may or may not be required to sign a purchase agreement with you before moving forward, and that agreement may or may not allow the bank to seek other offers in the meantime.
How Much Earnest Money Should I Submit?
When making an offer on a home, an earnest money deposit is a sign of serious intent to buy the property. It should be large enough to show that you are committed to purchasing the home, but not so large that you lose your deposit once the grace period expires. In most states, the grace period – the period after which the bank can keep your deposit whether or not you buy the property – is rather short. And you may have the home inspected, find out that the property will cost far more to restore than it's worth, and want to back out – only to find that your earnest money is no longer available.
With that in mind, a payment of 10% of the total price is a fairly standard offer. The larger the payment, the more competitive your offer letter will be.
Is There an Offer Form to Submit?
Each state has a standard contract that is used by banks, Realtors, and other industry professionals. Basing your offer letter off of this contract is a typical way to ensure it is easily understood, since the bank you are dealing with will be familiar with its contents.
Note that the bank will likely use its own contract, but even still, having a standard resource like a state sales contract will help you include all the pertinent areas. A Realtor can also help you submit a proper form.
Additionally, some banks may have standard forms they provide and either require or highly recommend for submitting offers.
Are Cash Offers Accepted or Favored?
Banks tend to favor cash offers because they do not contain as many complications and are pretty straightforward. They also ensure the bank receives the funds faster than with other forms of payment. As such, an all-cash offer is more attractive in general than other offer types.
What If Other People Have Submitted Offers for My Property?
The process can become longer and more complicated if other potential buyers have submitted properties. Some properties are in high demand, and the more favorable a property is, the higher the chance that other buyers have signified their interest with formal offers.
In this case, the bank has a variety of offers. It may send all buyers a counter offer; it may accept the most favorable offers and reject the rest; it may accept one offer and accept one or more offers as backup offers (if allowed by state law); it may reject all offers.
It's not just the dollar amount that is being considered; the bank is also looking for favorable terms. If a buyer offers to forgo an inspection period, that is more favorable to a bank, so that offer may stand out even if the price is a bit higher.
Once you have received confirmation from the bank, communicate with the agent at the bank responsible for the REO property to see what is needed from your end before moving forward.
An REO home can be a promising way of finding a cheap primary home or investment property, since the home in question is likely price at below market value. Purchasing a property from the bank can be competitive and lengthy at times, but ensuring you have a solid offer and follow the process correctly can make your offer stand out and help you obtain a great property at a great price.