There are certain things you should keep in mind when submitting an offer to purchase a bank owned home. There are some great opportunities right now and many foreclosures on the market. As an investor myself, I have purchased several bank owned homes. I have also helped many clients purchase bank owned homes.
First, I think its important to mention a big misconceptions I often hear.
- You can buy these homes for next to nothing - I have not found this to be the case. I have been involved in hundreds of offers on these type of homes and the banks simply do not accept offers significantly below their list price. For the first month, banks stay pretty close to their asking price. As time goes on they will begin to drop their price gradually but it is very rare to see a bank accept an offer that is significantly below the list price in our market.
Banks obviously want to sell these homes but sometimes you would never know it. They are usually very slow to give you an answer on your offer. You have to be very patient because it may take a week to get a counter offer or response to your offer. I have had banks take 2 weeks to give me an answer on an offer.
Banks don't want to play around, so make your offers as simple as possible and don't put a bunch of contingencies in your offer. These homes are sold "AS IS" and the banks don't want to make repairs or replace the roof, etc. They want to sell the home as it is and in their minds have priced the home to reflect the repairs. Don't expect them to make necessary repairs or put in a new water heater.
Don't put weasel clauses in your offer. For example: this offer is contingent upon the approval of my partner within 30 days. Keep the offer as simple as possible and minimize the contingencies. You probably will need an inspection contingency and a financing contingency and banks are usually OK with those.
Financing - If the home is in need of repairs, as many bank owned homes are, many banks/lenders will not want to finance these type of homes. I recommend using one of the local banks that offer rehab loans for investors. Columbia Savings and Guardian Savings have good programs.
Cash offers definitely help you offer get accepted. If a seller has two offers similar accept one is a Cash offer and the other is getting financing at a local bank, which do you think they will accept? There are too many things that can go wrong with financing and a CASH offer is clean and less likely to fall through. I have seen banks accept a cash offer eventhough it was much less than another offer that was planning to get traditional financing. CASH offers are very powerful.
Get your pre-approval letter from your lender before you start looking at houses. All banks require this letter or proof of funds with the offer. If it isn't included with the offer, the banks won't consider it usually.
Earnest Money - I recommend putting down at least $1000 as earnest money. You will get this back if the offer isn't accepted and you will get credit for it , if the offer is accepted. Let the seller know you are serious.
I always included a line in my offers to let the banks know I was buying the home AS IS and was not expecting the bank/seller to make repairs. I also let them know I was using financing that was designed for investors buying a fixer upper.
Most of the banks have their own addendum they will require the buyer to sign. Some of these are 4 to 10 pages long and many times you don't have to sign these until your initial offer gets accepted. Read these and understand what you are agreeing to. They often will have a $50 to $100 / day fee if you don't close by the target closing date. The banks want to make sure these deals close on time and they will expect you to pay these fees if you or your lender doesn't close on time.
Also, their addendum may have the buyer paying additional fees that are not normal you our area. Make sure you understand what fees you will be paying so you aren't surprised.
Inspections - When you decide to make an offer on a bank owned home, make sure you do your due diligence concerning your repair costs. If you are not experienced with home repairs, make sure you hire a home inspector to help you out. Put in an inspection contingency in your offer to give you 7 to 10 days to complete a whole house inspection. Buying distressed properties can be very risky if you are not very skilled at analysing the needed repairs and their costs. I know you may be very eager to buy a home, but please take your time and understand your fix up costs. This will make or break your investing experience.
Utilities - make sure you check your local utility companies to make sure there are no fees outstanding for the house you are planning to buy. These fees may not be found by the title company so you should check yourself. I have had properties in small villages that had tousands of dollars in outstanding charges that the local municpality tagged to the home for items such as removing and cutting up fallen trees and mowing the lawn.
Be ready to act quickly because these homes go fast if they are priced right.