Navigating the Purchase of a Foreclosure

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Typically foreclosures – or real estate owned (REO) properties – are a very good buy. They’re priced to sell, and buyers are likely to get a great deal IF you and your real estate agent are knowledgeable about the procedures and pitfalls you’re likely to face.

It happens all too often. Buyers aren’t aware of how different REO’s are from typical homeowner re-sales. Here are some things to keep in mind:

  1. The bank rules. They’ll dictate how the process will go from offer to closing.
  2. The bank looks at offers based on their offer process. Don’t be surprised if they won’t look at an offer while another is being negotiated. If they decide to look at your offer in the midst of another offer’s negotiating stage, be prepared to be asked for your “highest and best offer”. 
  3. If there is an agent listing the property on behalf of the bank, listen to them! They know the ins and outs of the process, and will be able to give you a head’s up on how things are moving along.
  4. Real estate professionals should have ALL addendums and documentation, such as the Lender Approval Letter. Keep in mind, many banks will require that you’re approved by their lender prior to making an offer. They’ll also require proof of funds.
  5. Follow their instructions to the letter. 
  6. Be sure to read the contract carefully… especially when it comes to earnest money and phrases like “seller can unilaterally terminate for any reason”. Banks can and will do what’s in their best interest.
  7. Pay close attention to any time sensitive items regarding the contract.
  8. You’ll need to keep on top of every step from offer to closing. If issues arise such as lender required repairs, let the bank know immediately.
  9. Have a cash reserve ready as foreclosures may have up-front costs, such as utility turn on and other miscellaneous items. You won’t be refunded any out of pocket expenses used during the process.

Foreclosures are not for the faint of heart. While the road may be a bit rough at times, it can really pay off (big time) for you if you have patience and determination. Good luck!

Do you have any foreclosure tips to share? Sound off below!

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2 Responses to “Navigating the Purchase of a Foreclosure”

  1. Greg Barnum Says:

    How about blogging on more specific aspects? How are Binding Agreement Date, Finance Contingency Period, or Due Diligence Period influenced by bank terms like “Effective Date” or “Verbal Agreement Date,” and what should Buyer agents do to protect clients against the time squeezes that sometimes result? Since the required Bank Addendum specifically override any conflicting terms in Purchase/Sale Agreements, Special Stipulations, etc., providing any kind of safety net for your client can be a challenge. Which typical provisions of bank addendum are most likely going to make it more challenging to protect against loss of earnest money, inspection fees, appraisal fees, and fees for closing delays? Agent Self Help has some good language to use for short sales and even for REO’s, but only if the bank doesn’t negate these provisions.

  2. Jody Says:

    Although the listing agent can help, they can also frustrate.
    My experience with foreclosure listings is that they often remain ACTIVE on the FMLS long after they are under contract or even closed.
    Always call the listing agent for a status update before you show an F/C. I have often gone to preview a property only to find out it’s sold or has been under contract for days – and continue to see them listed as active for days or weeks to come. Of course, this is frequently a problem with many properties, so sadly,, the need to call before showing is necessarily good practice.

    RE: “Highest and Best” – if a bank asks for the highest and best bid from your client and any other buyer making an offer, or from numerous existing bidders, new bidders can still come in with an offer that day. Make sure your client really bids their highest and best and not just what they think will get the house. If they don’t want to regret or blame you that they lost the house over a small percentage of the overall deal, encourage them to seriously think what the house is worth to them.

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