Many buyers perceive that they will get better value for their money by purchasing a bank owned home, and that can be true depending on the condition of the home. What many don’t consider are the additional issues and requirements beyond a “typical” purchase that are usually involved in a bank owned purchase.
Submitting the Offer
After submitting your offer, the bank may take longer than a typical seller to respond. Some will get back with an answer in a couple days, others may take a week or more. The delay is usually due to the internal review process that a bank must go through for approval of an offer. However, you should get an answer back much faster than if it was a short sale situation (which can be months in those cases). If multiple offers are involved, you may have to go through additional counter-offer rounds before a final offer is selected.
Offer Acceptance and the Addendum
Assuming they decide to accept your offer, you can expect to get an addendum to the purchase contract which spells out the bank’s terms and conditions beyond (and usually overriding) terms in the standard contract. One of the main points that is stressed over and over again in these addenda is that the purchase is “as-is”. You are buying the home in the condition as it currently exists, with no expectation of repairs. In some cases you may get a repair credit for items required to meet FHA/VA loan standards.
Usually you will get a verbal acceptance to be followed by the addendum. You sign the addendum and then send it back for the bank to sign and finalize the contract. This process can take several days. You can’t start escrow until you have the contract and addendum signed by both sides.
Inspections
Typically, the bank considers the clock to start ticking on inspections and other terms after they give a verbal acceptance. This is not the case in “normal” sales which require the contract signed by both parties before such items come into effect. When dealing with banks, you have to play by their rules.
In one purchase I negotiated for a client, the addendum stated that upon signing, the buyer agreed to waive all inspections. They effectively eliminated the 10 day inspection period requested in the original offer. We got the addendum with 4 days before the signed addendum was due back to the bank. Fortunately, one of the inspectors I work with was available on short notice and we got the inspection done before the deadline. Also fortunately, there were no serious issues (which the bank would not fix in any case), and the sale made it to closing.
If possible, try to get a copy of the addendum up front so you know what to expect, although it may not have all the terms for your specific purchase.
Beware the Penalty Fees
Another common addendum requirement is that you must close on the date agreed upon. If you miss that date, the bank will usually charge a daily fee of around $100 until it closes. You may be able to have the fee waived if the delay is caused by the bank, such as when the closing date the bank accepted was not realistic by the time they responded to the offer and got the signed contract into escrow. It’s best to pad the closing date to give enough time to close, although this can be a concern in a multiple offer situation where favorable terms to the bank will help your offer.
Finally…
Buying a bank owned home can be a significant cost saver. Just be aware of what you are buying and the true costs if the home needs work to get it back into acceptable condition.
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As a home inspector who has performed over 100 REO inspections in the last year, I have found that most have major defects as defined by our AZ State Standards of Professional Practice. Banks usually have a budget for dealing with repairs, if the inspection process is performed and repairs are requested. AZ State law does not allow the sale of real estate which is not “habitable” which generally means that it must be able to receive an occupancy permit from the local municipal authority. A “C of O” generally requires a residential home to be heated and cooled, with internal (working) plumbing, no moisture entry and no major structural, safety, health, or other environmental issues (no mold, etc.). The bank may refuse to sell the property, but once they are made aware of the “major defects” they may be held responsible for the lack of disclosure… attorneys love to fight these sorts of things… The smart move is to always have a REO inspected and be sure to include the inspection contingency in your contract.
Thanks Allen, good information and advice. I always advise my buyers to get an inspection. If the bank won’t allow an inspection contingency, then the buyer should get it before the offer is made, or in the example I used above, before the final acceptance of the addendum.