As a successful Traverse City Realtor who lists and sells a lot of bank foreclosure homes (Bank Repo, Bank Foreclosure Homes or Real Estate Owned properties), I can say without a doubt that they come in all sizes, shapes, styles and prices! Buying Traverse City bank foreclosure homes involves many important factors to consider.

Buying Bank Owned Properties (REO)

You’ve probably seen the late night TV ads about buying bank foreclosures cheaply. It sounds great and it might just happen, but first you should take a look at some facts and get prepared.

REO vs. Foreclosure

An REO (Real Estate Owned) home is a property that goes back to the mortgage company after an unsuccessful foreclosure auction. You see, most foreclosure homes do not sell at auctions and most don’t even generate bids. After all, if there was enough equity in the property to satisfy the loan, the owner would have probably sold the property and paid off the bank. That is why the property ends up at a foreclosure or trustee sale in the first place.

Foreclosure sales begin with a minimum bid that includes the loan balance, any accrued interest, plus attorney’s fees and any costs associated with the foreclosure process. If you are the successful bidder, you receive the property in “as is” condition, which may include someone still living in the property. The redemption period for most foreclosures in Michigan is six months. There may also be other liens against the property.

Since what is owed to the bank is almost always more than what the property is worth, very few foreclosure auctions result in a successful sale. Then the property reverts to the bank. It becomes an REO, or a “real estate owned” property. That’s where I come in, as the REO bank foreclosure property listing agent.

REO Properties For Sale

The bank now owns the property and the mortgage loan no longer exists. The bank will handle the eviction, if necessary, and may do some repairs. They will negotiate with the IRS for removal of tax liens and pay off any homeowner’s association dues. As a purchaser of an REO property, the buyer will receive a standard title insurance policy.

A bank owned property might not be a great bargain. As a realtor, I make sure that the price buyers pay (if our negotiations are successful) is comparable to other homes in the neighborhood. Consider the costs of renovation, including time to complete them. Don’t get caught up in a “bidding war” with other buyers and pay over market value. When multiple offers are placed simultaneously by different buyers on an REO or foreclosure property, the bank usually asks both parties to come forth with their “highest and best” offer. All parties may try to outbid each other and the result is the price going up.

It’s generally an old myth that foreclosures are a great bargain. Keep in mind also that most REO and foreclosure properties are sold without appliances. This means you have to plan ahead to buy that refrigerator, stove and dishwasher.

How Banks Sell REOs

Each bank/lender works a little differently, but they all have similar goals. They want to get the best price possible and have no interest in “dumping” their real estate cheaply. Bank sellers will generally try to get fair market value for their homes, irregardless of the amount owed and defaulted by the previous owner. Many buyers call me and think that the bank will settle for the amount that was owed on the property. This is a very serious error in assumption about REO bank owned homes, especially in Traverse City. Generally, banks have an entire department set up to manage their REO inventory, or often will outsource their REO homes to various asset managers.

Once you make an offer to purchase, banks generally present a “counter-offer.” It may be at a higher price than you expect, but they have to demonstrate to investors that they attempted to get the highest price possible. You should plan to counter the counter-offer. Banks almost always counter offer pretty much at full price.  Your offer or counter-offer will probably have to be reviewed and approved by several individuals and companies. Even once an offer is accepted, you must have a fully signed physical offer and is accompanied by addendums for the buyer to sign. In Michigan, these include, but are not limited to, “As-Is/Where Is” addendums and Mold addendums. Basically, you are agreeing in writing that you are buying the home “as-is.”

Property Condition

Banks always want to sell a property in “as-is” condition. They make no warranties, expressed or implied, about the condition or functionality of the property. They may allow you to get all the inspections you want (at your expense), but they may not agree to do any repairs. Remember, the prior owner left the premises after losing their home. They may or may not have been concerned with the condition the home was in and the bank does not know many details about the property or its working condition. Remember — there are also many bank foreclosure homes out there that are in wonderful condition as well!

As your Realtor, the offer I write will include an inspection contingency period that allows you to terminate the sale or amend your offer in the event the inspections reveal unanticipated significant impact damages that were latent or unable to be observed previously. This could be a defunct furnace, seriously damaged plumbing, non-functional well or faulty electrical. These would be examples of “significant impact” damages. I always recommend that a certified, licensed professional inspect your home.

Even though you agreed to “as-is,” you can give the bank another opportunity to make repairs or give you a credit after you’ve completed your inspections if major items are found. Sometimes they’ll re-negotiate to save the transaction instead of putting the property back on the market, but don’t take it for granted. Banks will also tend to be more flexible on price if the home has been listed on the market for four months or more.

Most foreclosure homes are in need of some sort of repair. Ask yourself these questions:

• Am I willing to do, or do I know someone who can do the work?
• Will the home, in its present condition, appraise for the value I am trying to buy it for?
• What will the home, after my repair efforts, be worth at fair market value?

Banks do not generally issue disclosure statements, as they did not live in the home and therefore are unaware of possible issues with the home. Disclosure statements, unless the home is bank owned, are required in the State of Michigan, legally disclosing to potential buyers any known issues with the home.  Most banks will fill out blank disclosure statements with the statement: Non-Applicable. This is due to the fact that they have never lived in the home and disclosure statements do not apply. Even though disclosures are mandatory in Michigan, this is a legal practice. It's wise to put terms into the purchase agreement on any REO bank foreclosure properties that state that the home purchase is contingent upon inspections and that the offer can be revised or revoked upon the finding of significant impact damages found during the inspection period.

Most banks will not provide financing on their REOs but it doesn’t hurt to ask. Especially if the property has extensive damage and you are purchasing it “as is.”

Making an Offer

Bank-foreclosed properties can be bought at a good price, but the listing price is based on many factors, such as several Realtor home evaluations, results of professional appraisals, State Equalized Value (SEV), past sales of the home, and what is owed on the home. The bank that owns the property lists the home, pricewise, accordingly based upon the condition and appraisal values.

Bank Repo homes are generally bought with cash and financing only. They typically insist upon closing within 30 days of “bottom-lining” the contract, or when both parties agree on terms. 99.9% of the time banks will not consider alternative financing, such as land contracts, rent-to-own or 1031 Exchanges. Banks also will not consider offers that are contingent upon the sale of another home. For example, if your home is for sale and locked under contract to sell at the end of this month, the bank will not enter into a contract with you to buy one of their REO's until your house is sold and the closing has occurred.

Offers are sometimes faxed to the bank, but normally the listing agent emails the offer to the bank and the negotiations are done more or less verbally. There is no formal presentation. Keep in mind: nothing happens evenings and weekends (banks are closed). It sometimes takes a lot of patience when waiting to hear back on an offer that is placed on a bank-owned (REO) home. These banks have hundreds, if not thousands, of properties that are being offered on. Patience is a virtue!

Since there is no face-to-face presentation to the bank and they do not know how financially secure you are, provide the listing agent with a pre-qualification or better yet, a pre-approval letter. It’s also much better to put a good chunk of money down as an escrow deposit. Banks will see this action as a very serious gesture and take your offer much more seriously. Imagine you were selling your car and someone wanted to put a $5 deposit down to hold it so you wouldn’t sell it to anyone else in the meantime. How serious could the buyer be? Make your Bank Owned Foreclosure (REO) offer REAL!

If you can close on the home sooner, this is also much more attractive for your offer, as getting this home “off the books” sooner is much more appealing to the bank. Make your offer easy to accept and more attractive to the seller, and you will up your chances of an approved offer.

Hopefully these tips will help in your search for a bank foreclosure or REO property. Remember that REOs generally sell at pretty close to full market value and list price and are not usually the deals promised on late night television.