Elite Properties agents have been representing buyers on lots of foreclosure sales this year.  What’s more, we’re not alone — some 65% of the more than 12,000 homes that sold this year through the MLS were bank owned properties.  With a typical selling price of about 20% less than a comparable non-distressed home, it’s no wonder that most buyers opt for an bank foreclosure if they can find one that suits their needs.

Though we think the rewards of a foreclosure purchase generally far outweigh whatever minor difficulties we help our buyers overcome in the foreclosure buying process, there are nevertheless a few differences from a traditional sale that we think buyers should know about when they buy a foreclosure.  This is not to scare you away from foreclosures, which we think are great opportunities.  However, as always, the more you know up front, the more likely you are to have a transaction that runs smoothly and successfully.

How Foreclosure Transactions Differ From Non-Foreclosure Transactions

1. The sale will almost always be an "As Is" Sale
   Bank foreclosures are typically sold As Is, meaning the bank will not generally agree to make any repairs.  You still have an inspection period where you will have your inspectors examine the property and give you written reports on its condition, and you have the right to cancel the agreement if anything alarming shows up.  What you don’t generally have is any leverage to have the seller fix conditions for you. 

   Of course, every rule has an exception, and the exception in this case is that banks will sometimes agree to fix items required by an FHA lender, if you’re getting FHA financing.  We’ve negotiated this successfully many times.  To be sure, banks prefer conventional financing because conventional loans don’t generally have such prior-to-close conditions, but if you need FHA financing, it’s doable in many cases and we have a lot of experience with it.

2. The banks will counter our standard California Association of Realtors® (CAR) Offer With Their Own Addendum
   You should read over the addendum the bank sends back carefully, and go over any questions you may have with your Realtor®.  In almost all cases, the addendum will include:

1. A shortening of the escrow period.
   We often use 30 days as a "typical" escrow period when writing the offer.  Expect the bank to counter with a shorter period, often 21 days or thereabouts.
2. A shortening of your inspection period.
   The "default" inspection period in the CAR purchase agreement is 17 days.  The banks will often want to shorten this to something like 7-12 days.  Our main concern is that you have enough time to perform your inspections, so your agent’s job becomes getting all your appointments scheduled quickly and getting you the reports you need.  We have a lot of experience getting this done.
3. A per-diem penalty if the buyer fails to close on time (due to buyer’s default).
   The bank addendums typically include a clause where the buyer will pay a daily fee to the bank if they fail to close on time.  Often this daily fee runs somewhat higher than typical rents, with $100 to $150 per day being common. 

   Because the seller has both shortened your time to close and will charge you if you don’t get it done on time, it’s very important to get your financing in place if you’re buying a foreclosure before you write an offer.  At minimum, you should have a completed loan application with credit check submitted to your lender before you write a foreclosure offer.  This is not only important so you’re able to close on time and therefore avoid per diem charges, but many banks require direct lender approval for the offers they’ll consider.  This means approval from an underwriter working for the person with the money, not a mortgage broker loan pre-qualification letter.  Getting to this stage means getting with your lender before you shop, not while you’re in escrow!

The Banks Are Exempt from Some Disclosures, and Your Agent Should Know Which Ones!
The law on real estate disclosures recognizes that — unlike a private owners — banks that own foreclosures almost always have never even seen the home.  Therefore, many disclosure forms that would otherwise be required such as a Seller’s Transfer Disclosure Statement are not required on a bank foreclosure.  The agents and brokers still have a statutory duty to disclose the results of a reasonably competent and diligent visual inspection, however, and you as a buyer are strongly advised to order a whole house inspection, pest inspection, and other inspections as needed.

Because the banks are exempt from some disclosures, REO sellers (and often the listing agents representing them) are often ignorant of what disclosures they are NOT exempt from.  Again, we have a lot of experience making sure you get the proper disclosures in the file so you can review them.

The Bank’s Title and Escrow Providers Warning:  Idiots In Mirror Are Dumber Than They Appear
On a non-foreclosure transaction, Title Insurance and escrow providers are often suggested to buyers by the agents on the transaction, based on which providers have done a good job for our clients in the past.  On a foreclosure transaction, in contrast, title and escrow providers are selected by banks who choose the absolute cheapest alternative regardless of the quality of the work.  As a result, we often get in a situation where it’s difficult to get a response from people who are crucial to providing you with some of the reports and disclosures you need.   Our approach in this case is three-fold.  First of all, we stay on them.  Secondly, we get the listing agent involved as much as possible.  Third, if there are inevitable delays because the title company is non-responsive, we document this well to avoid having the per diem charges apply.

In spite of the issues above, we believe the major discounts of bank owned properties represent a great opportunity for our buyers.  Our job is to inform you about the differences and minimize the negative impact of those issues that seem to be endemic to foreclosure transactions, so you get the benefit of the price without having to give up too much in the way of convenience.

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