Tips for Buying Bank Owned Properties as Real Estate Investments
Bank properties are quickly becoming the preferred type of real estate investment among investors. Although these homes typically require repairs, they are priced below market value and are being sold with clean title; allowing for a quick transfer and the elimination of problems commonly associated with purchasing real estate in foreclosure.
Bank properties may consist of residential homes, commercial real estate, or vacant land. Once real estate is repossessed by lenders, properties are first put up for sale through public foreclosure auctions. Investors who buy homes through auctions are responsible for removing tax liens and judgments from creditors, as well as evicting tenants who refuse to vacate the premises.
Auction prices cover only the amount owed on the first mortgage. If there is more than one outstanding mortgage, buyers must enter into negotiations to pay the outstanding balance of the note. This can be a long and expensive process that slows down transfers of ownership.
Another downside to buying foreclosed real estate is that many states allow a redemption period that gives foreclosed property owners the opportunity to buy their home back from the winning bidder. Ownership transfers may be suspended for 30 days or more when redemption periods are in effect.
Investors are now turning to bank-owned homes as an alternative to buying foreclosed real estate through auctions. Although the cost of bank properties is higher than foreclosed homes, investors can take immediate possession and start generating income.
One of the biggest challenges investors face is negotiating the sale price. Once the lenders take possession of the foreclosed properties, they list them for sale through their loss mitigation division or local real estate agents. Their primary goal is to obtain the highest price to offset the losses suffered from the foreclosure process.
Banks rarely lower prices on newly listed foreclosures unless substantial damage is found during property inspections. To get the best price, it’s best to look for properties that have been on the market for 31 days or more. Loss mitigators are generally more open to negotiating prices when distressed properties have been on the market for several months.
Investors who buy houses with cash often have a better chance of getting reduced prices because they can take possession immediately. Most banks require buyers to obtain pre-approved financing before submitting offers on bank properties.
A lesser-known option for buying bank-owned homes is Fannie Mae’s Home Path Mortgage program. In addition to offering a low 3 percent down payment requirement, investors may also qualify for Neighborhood Stabilization Program grants offered through the Department of Housing and Urban Development.
Real estate investors can apply for up to five NSP grants. Funds are provided to qualified applicants who purchase real estate in areas with substantial amounts of foreclosed property. Investors must use NSP grants to rehab the house.
Locating exceptional foreclosure deals takes time, but can provide substantial savings. It is not uncommon for bank properties to be listed at 20 to 30 percent below market value. However, investors must exercise due diligence to ensure that the property does not require extensive repairs that could deplete savings.