What to Expect When Buying a Foreclosure

Earlier this week, I was showing some first time homebuyers this week a home that had been foreclosed on.  They asked me what they should expect when buying a bank-owned property, also called an REO (real estate owned) property.

I spent some time working as a buyers’ agent for one of the bigger REO listing agents in Denver during the last year, and I’ve personally closed deals with variety of sellers, including agencies such as HUD, Fannie Mae, VA and financial institutions such as Bank of America, Chase, and HSBC Bank.

Here are some expectations to have if you’re considering an REO property in Colorado.

What You Won’t Get When Buying a Foreclosure

Property Disclosure:  You won’t receive a sellers’ property disclosure.  The bank didn’t live in it, so they don’t know what maintenance has or has not been done to the property or the age of the furnace.

Inclusions:  The bank is selling the property, not what is inside of it.  If there is a fridge or a clothes dryer, the bank isn’t going to remove them from the property.   However, they are not included as part of the sale.   So if they get stolen before closing or are somehow damaged, they don’t want to replace them.

The ability to “flip” or quickly resell the property:  Fannie Mae, Freddie Mac, and some financial institutions have restrictions that require a buyer to hold a property for a minimum number of days before reselling it.  I have most commonly seen a ninety (90) day restriction.  Not all Fannie Mae or Freddie Mac properties have the restriction and if you do encounter it, you may be able to negotiate to lessen the number of days. Generally speaking, the longer the property has been on the market the more willing the seller is to negotiate.

Daily Per Diem: In traditional sales, the buyer and seller can negotiate a daily fee that the seller must pay the buyer for not closing according to the terms to the contract.  Banks won’t negotiate on such a fee and will require the buyer to default to a zero dollar per-day-fee.

Bank Addendum: All institutions have some variation of an addendum that can be somewhat lengthy.  They require the buyer and usually all of the agent s sign it and won’t consider a home as under contract until it is received.   The addendum often conflict with state laws; buyers should always consult legal counsel before signing such a document.

What You Might Get when Buying a Foreclosure:

Owners Title Policy: Most financial institutions will pay for the owner’s title policy, though HUD and VA will not.  Be sure to adjust your offer accordingly.  The cost of the owners’ title policy varies based on the price of the home.

HOA Documents: Banks will often not pay for or be responsible for providing buyers with homeowner’s association documents.  Such documents are usually at the buyers’ expense.

Additional Expenses: You may have some additional expenses when buying a bank owned property.  Such expenses include a nominal charge for an online system call “equator” that banks and agents use to manage transactions, HOA transfer fees, and HOA status letter expenses.  Some financial institutions re-key the property prior to closing and charge you $150 for the service.  This expense is non-negotiable, even though you could do it yourself for much less.  You also won’t get garage door openers, mailbox keys, or neighborhood clubhouse access keys so these are all at the buyers’ expense and are the buyers’ responsibility.

Water for Your Inspection:  Banks turn off water in the property and “winterize” the home to prevent damage from broken pipes.  This means that there isn’t water sitting in the pipes or in the hot water heater.   If you want the water turned on for your inspection, many banks require you to use and pay their plumber to assist with having the home “de-winterized”.   This allows the inspector to test systems and check for broken pipes.  Most banks require the plumber to “winterize” the property again after your inspection.  You’ll usually be on the hook for this cost.  Most times, it doesn’t matter if it is cold outside or not, you are still responsible for the winterization process.

A Signed, Colorado Real Estate Contract: VA and HUD do not sign a state contract.  Instead, they have a separate, uniform contract that they use across the country.  Other financial institutions or agencies will stamp the Colorado contract with “not lived in bank owned” and return that to you.  They may also assign the rights to sell to an asset management company and the asset manager will sign as “attorney in fact” on behalf of the institution.

Other Things to Remember:

  • Buyers must submit proof of funds or a pre-approval letter from a lender.  No exception.
  • Banks may ask the buyer to give them a chance to earn their business for the mortgage.  So if Bank A is selling the property, they will ask you to submit a pre-qualification letter from Bank A before they will consider your offer.
  • There may be a period of time in which only buyers who intend to make the home their primary residence can make offers in on a property.  After the expiration of that time, investors can place offers.  This period may range from 5 days to 30 days.

Author of this Post

Questions about this post? Just comment below or you get in touch with me:

Michelle Ackerman

michelle.ackerman@redfin.com
Serving Denver, Englewood, Littleton, Centennial
Homes Closed: 50+
  • Savannah

    On a Fannie Mae foreclosure is it true
    that if you do not move into the home within 6 months or you will be fined 10000? If so is there a way to get an extension because the home has to be remodeled?