Peggy Chirico ~ Hartford & Tolland County Real Estate Blog

Should I buy a bank-owned (REO) property?

I am often asked by my buyer clients if they should consider buying a bank-owned property.  If you have considered buying a bank-owned property but you weren't sure if it was an option for you, this post will provide you with some valuable information about the realities of buying a bank owned property.  

Most people are intrigued with bank-owned properties because the listing price is usually much lower than market value.  But there is a reason for that.  Be prepared, if you decide to go after one of these bargains, that it may not be the bargain you were hoping for. A bank-owned property may be right for some people, but it is not the option for everyone.  I always recommend that my clients look at bank-owned properties with both eyes wide open.  Here are just a few things to consider:

How much of a bargain are you looking for?  In general, the cheaper the price (relative to assessed value), the more repairs are required.   Of course, some REOs are in great shape and if that is the case, you will not get as much of a bargain as you may be seeking.  The banks take into account the repairs that need to be done and base the price on that.  In other words, the price is not arrived at blindly, and many banks will stick fairly close to the list price.  If the house has been on the market for a long time, you will more likely be able to offer less than list price, but the banks often lower the price when it has been sitting on the market, hoping to entice buyers.  I have had many instances in which my clients have wanted to offer a third less than list price and that has never flown.

When was the house winterized?  Just because it was winterized in November doesn't mean that it didn't sit empty since last winter with the heat turned off.  If the bank states that it will not turn on utilities for the inspection, they are fairly sure that there is freeze damage, and turning on the water or the gas to test plumbing and heating would only cause further damage.  You will need to factor in costs for pipes, plumbing, and the heating system.

Has there been water damage prior to winterization?  If pipes burst (in the walls, in between floors, in the basement), there is also a possibility for mold.  Simply draining the system and leaving the heat off may do nothing to stop mold that may be growing as a result of the water damage.  Mold testing and remediation are not cheap.

Can you get a mortgage or do you have the money to purchase the home and pay the repairs?  Some properties will not qualify for FHA loans and state "cash or FHA 203K financing only." 

If you are planning on living in the property, do you have somewhere to live while the property is being renovated?  Renovations usually take longer than expected, whether you are doing the work yourself or not.  If you are considering a 203K loan, a licensed contractor must do the work and be approved (an extra layer of paperwork) before the money is released.  Check with your mortgage advisor for the details on a 203K loan before you assume that's what you want to do.

Buying a bank-owned property is not for the faint of heart.  If you decide to move forward with putting an offer on a bank-owned property and it is accepted, continue to gather information.

• Have a home inspection. Even if the water and gas cannot be turned on, you can still have an inspection of the electrical system, structure, pests, radon, asbestos, etc.  If you find out that the property is in worse shape than you imagined, you will still be able to rescind your contract if you do so within the allowed inspection period.
• Get estimates for the worst-case scenarios.  Meet with contractors, listen to their opinions, and price out renovation costs.
• Ask yourself and your REALTOR whether you will be able to sell the house at some time down the road.   Some properties are so quirky that resale is a problem.  Quirky issues include odd layouts, location, erosion, wetlands, shared driveways or wells, power lines, etc.
• If you are having second thoughts about the transaction, listen carefully to yourself.

A bank-owned property can be a tremendous opportunity, but only if you go into it with both eyes wide open and make wise decisions.