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Should We Buy a Bank Owned Home or a Regular Home?

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bank-owned for sale sign on a house with an american flag

There are differences between buying a bank-owned home versus a regular home owned by a traditional seller.

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Question: Should We Buy a Bank Owned Home or a Regular Home?
A reader asks: My wife and I are first-time home buyers. In our city, we see a lot of homes for sale that are bank-owned homes. We talked with an agent at an open house who told us it is just as easy to buy a bank-owned home as a regular home. But our friends say no, buying a bank-owned home can be a nightmare. Is the agent lying to us? Which is easier to buy? Should we buy a bank-owned home or a regular home?
Answer: Let me guess. Is the agent who told you there is no difference between buying a bank-owned home versus a regular home by any chance an agent who works for the bank? If so, in all fairness, REO agents probably do believe that buying a bank-owned home is just as easy as a regular home. That's because, for many of them, bank-owned homes are the only homes they sell.

My experiences have been somewhat different because I sell a variety of homes. Big homes, small homes, luxury homes, starter homes, condos, townhomes and a fair number of short sale homes and foreclosures, as well as homes owned by regular sellers who have equity. By far and large, I'd rather sell a regular home any day of the week, and I'll tell you why.

Mixed Markets of Bank-Owned Homes and Regular Homes

It makes a difference as to whether the number of homes on the market are mostly foreclosures. If a regular seller is selling in a market dominated by bank-owned homes, regular sellers need to compete on price with foreclosures, meaning that seller needs to price a home in line with the prices of bank-owned homes.

Some REO banks insist that their agents market their inventory just like any other home and they prefer that the agents not disclose the home is a foreclosure. That's because foreclosure homes carry a stigma. You might not find a bank-owned for sale sign on the home's sign post. The marketing comments in the listing not clarify that it's a bank-owned home in MLS. And, in all fairness to the bank, the bank is simply trying to compete in the open marketplace. But there are differences between the two.

Bank-Owned Homes Have Little or No Seller Disclosures

When you buy a home from a regular seller, that seller knows the history of that home. You can find out whether the kitchen sink ever backed up, when the roof was last replaced and if there are any defects that a home inspection might not reveal. When you buy a bank-owned home, you're on your own. You're buying an unknown factor with very little recourse.

Bank-Owned Homes Are Typically Sold in As Is Condition

Banks are rarely willing to make repairs. They generally will not pay for a pest inspection nor give buyers a roof certification or sewer inspection. If your home inspection discloses a major problem and you submit a Request for Repair, the bank might tell you to go pound sand. Whereas a regular seller is much more likely to negotiate that repair request and / or fix the problem for you.

Negotiating a Bank-Owned Home Might Take Longer Than a Regular Home

Many REO agents handle a huge volume of listings. They often work for an asset manager who in turn works for the bank. Some banks won't even look at an offer unless it is accompanied by a preapproval letter from the bank's chosen lender, which means it can take even longer to submit an offer in the first place. Due to the volume and levels of command, it can take up to two weeks or longer to get a response from the bank.

Bank-Owned Home Purchase Contracts Tend to Favor the Bank

When the bank does accept an offer, it often generates a bank addendum that, for all practical purposes, pretty much replaces the offer you submitted. The bank addendum can consist of 10 pages or more. Almost every important item that protected the buyer is in some way, shape or form, altered. If you're buying a bank-owned home, it is a good idea to have your lawyer review the bank contract because the verbiage is sometimes hard to understand.

Banks Might Charge a Per Diem for Extending Closing

In northern California where I work we often end up with a southern California escrow company handling the transaction. That can delay paperwork, and the process is foreign. In addition, if the buyer's lender needs another couple of days to release the file from underwriting, the bank often will charge the buyer a fee. That fee can be $100 a day to extend. Why? Because they're a bank and they can get away with it. Regular sellers are generally more forgiving and relaxed about extensions.

At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.

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