What Can Go Wrong When Buying Foreclosed Property from a Bank?

Buying a foreclosure property from a bank can be a lengthy process.

In times of economic downturn or depression, an increase in bank-owned foreclosure property can offer real estate investors the opportunity to purchase new property at substantial savings. While purchasing property from a bank is generally a safe transaction, other issues can result in problems for the purchaser. Proper investigation and pre-planning can help purchasers avoid some issues or prepare for others.

Price

Some foreclosure auctions are held online, making it difficult to know who you're bidding against.

Purchasing foreclosed property from a bank does not necessarily ensure a great deal or discount on the property. When banks set the asking price for a bank-owned property, also referred to as a real estate-owned (REO) property, they include the balance owed on the previous owner's mortgage, interest, legal fees and other costs related to the property. In many cases this price may be near or even above market value or comparable non-foreclosure listings in the area. Getting a deal on the property can require negotiation and patience. Also, banks go to great lengths to publicize their property for sale, so there may be lots of competition for the property. This bidding frenzy can often result in buyers paying more for a home than other comparable property.

Time Frame

Some banks have small foreclosure departments, resulting in long processing time frames.

Depending on the amount of foreclosure property owned by the bank in question, as well as the number of bank staff dedicated to this issue, completing a foreclosure purchase can be a lengthy process. Processing purchase offers, negotiating with bidders, handling sales paperwork, scheduling inspections and other issues related to the sale can take time to complete. Since, in most cases, the bank is losing money on the sale of the property, the sense of priority to complete the sale may not be the same as that of new loans or other profitable operations.

Condition

Post-purchase inspections may reveal issues such as termite damage or sinkholes.

The nature of foreclosed property can often lead to issues of poor condition or damage. In some cases this is the result of damage by the previous homeowner or simply neglect by the bank since the foreclosure. Since banks do not always provide ample inspection time prior to sale, structural damage or other issues that may significantly impact the value of the property can go unnoticed. This possibility increases for online bank auctions, where remote bidders don't have the ability to inspect the property and rely on the bank description or assessment.

History

Home construction that was not properly inspected may result in an inability to obtain insurance.

Although banks may legally have to disclose property issues such as mold or structural damage, many other historical issues may lurk within a foreclosed property. For example, details such as historical issues with property flooding, shoddy repairs or non-permitted construction may not emerge until after the sale of a property. Since foreclosure sales are typically "as is," legal recourse for the buyer may be limited.

References

• MSN Money: Is it safe to buy a foreclosure?

Resources

• RealEstateabc.com: Buying Bank Owned Properties (REO)