Do you want to learn how to buy a bank-owned home? If so, understanding the differences between buying bank-owned property with cash and purchasing homes from traditional sellers is an important place to start.
Buying bank-owned property with cash, as it turns out, is one of the best ways for today’s investors to land a great deal. However, the process isn’t the same as buying a home through a traditional seller; several differences warrant your consideration. Continue reading to learn about how this investment strategy varies from a traditional deal, and perhaps even more importantly, what will give you the biggest advantage in purchasing a bank-owned property.
A bank-owned home is a distressed property that has been repossessed by the loan originator after the previous owner has failed to keep up with mortgage obligations. As their names suggest, bank-owned homes are added to the originator’s (usually a bank) inventory of properties—hence the bank-owned moniker.
To better understand what a bank-owned home is, however, you must first familiarize yourself with the role traditional banks play over the course of the mortgage process.
Traditional lending institutions are in the business of making investments of their own; namely in those looking to buy a property. In other words, banks are investing in the very people seeking out their services. In extending their financial services to prospective buyers, banks expect to earn interest on the money they lend out, not unlike the private lenders most real estate investors have come to rely on.
In a perfect world, banks stand to make a lot of money in interest by simply lending to those in need of it. However, the lending industry isn’t without its own caveats. Much like any other investment vehicle, the lending strategy of banks has become ubiquitous with an inherent degree of risk. The failure of borrowers to meet their own mortgage obligations is a very real threat to the bottom line of banks across the country. There is no doubt about it: banks stand to lose money in the event borrowers aren’t able to repay their mortgages.
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In the event a borrower is unable to comply with their mortgage obligations, the bank will foreclose on the subject property to recoup any losses. It’s worth noting, however, that while forecloses are certainly unfortunate for those experiencing them first-hand, they represent a great opportunity for investors versed in the real estate ownership market.
In foreclosing on a property, the bank repossesses the asset to salvage anything and everything they can. In doing so, the lender is also taking on a non-performing asset (the home is not making them money, but rather hurting their bottom line). What was once an asset designed to bring in interest is now a liability. If for nothing else, banks aren’t in the business of holding on to properties that aren’t producing for them. Every day that a bank holds on to a property that is repossessed, it is losing money. Having said that, it’s reasonable to assume banks want to remove any non-performing loans from their books.
To ease the burden of any non-performing loans, banks will attempt to sell any unpaid mortgages at a foreclosure auction. Provided the property makes it through the auction process without being purchased, it becomes an aptly named real estate owned property (REO). That means investors wanting to learn how to buy a bank-owned property can either obtain one at auction or at a later date by negotiating with the bank. Regardless of which strategy you decide to commit to, understand that nothing speaks louder than cash. If for nothing else, cash is the one thing you can’t buy a bank-owned property without. Continue reading to better understand the REO sales process.
When it comes to actually buying a bank-owned property with cash, the process isn’t all that different from its traditional counterparts. The basics remain the same: the buyer acquires a loan to pay for the new real estate asset. That said, the process of buying a bank-owned home tends to depart from traditional home sales when prospective buyers are searching and negotiating with banks.
For instance, those intent on buying bank-owned homes don’t need to scour listings on the Multiple Listings Service (MLS) or collaborate with investors; they simply need to talk to their local banks. It is possible to find bank-owned homes on sites like RealtyTrac and RedFin, but going straight to the source (banks and lenders) is typically the best method. Once there, buyers will need to locate and talk with the individual responsible for dealing with REO sales.
Prospective buyers may obtain a list of the homes for sale and proceed to make offers on the ones that meet their needs. It is worth noting, however, that it’s not enough to simply make an offer that undercuts the bank’s valuation of the home. Lowballing the lender is a fast way to get your offer thrown out. Instead, buyers will want to convince the lender that selling to them at a certain price is worth their while.
Remember, banks don’t want to hold onto these homes; they are costing them money each day. Therefore, investors need to submit a convincing buying argument in the form of a buyer’s packet. The packet should (among many other things) state their case for what they want the home at their offer price. This is where you will want to convince the bank that your offer is worth more to them than holding onto the property.
Don’t forget that there will be other investors in the area trying to do the same thing as you, so don’t be afraid to offer more than you would for a traditionally distressed home. Sometimes it’s worth offering a few more thousand dollars to secure a home that will net even more profits on the backend.
Buying bank-owned property has become synonymous with several benefits. However, there is one significant caveat: the buying bank-owned property process isn’t the same as buying a home from a traditional owner. That said, those who can get comfortable with the following system may find the benefits well worthwhile:
Traditional lenders and institutional bankers are not in the business of holding onto non-reforming assets. Any asset sitting on their books is most likely dragging down profit margins. If for nothing else, maintaining the properties is simply a drain on their own assets; it costs money to hold onto repossessed homes. As a result, lenders are always looking to rid themselves of these assets and will entertain any serious buyers. It is worth noting, however, that even lenders won’t just give away the homes; they want something worthwhile in return, and cash will almost always provide buyers with an advantage.
Lenders prefer cash for several reasons:
Cash instantly awards those who have it an inherent advantage over those that don’t; it’s as simple as that. Cash, or even cashier’s checks, avoid the mess that is traditional financing options and allows investors to close faster. It’s also worth noting that most auctions will require cash or cashier’s checks to attend and purchase assets. To be certain, call the auction you intend to attend and find out their preferred method of payment.
Bidding on properties at foreclosure auctions requires an acute attention to detail and a mind for due diligence. That said, nothing is more important to attending a foreclosure auction as an active participant than having your finances in order, as you will be expected to pay upfront.
And while having your finances in order can mean many things to many different people, there is one universal condition that must be met: a majority of auction trustees will require each individual to have their respective bidding amount in the form of either cash or a cashier’s check. Failure to comply with the rules set forth by the particular auction you are attending could result in the loss of the asset, so it’s in your best interest to have cash on hand.
I recommend attending auctions with cashier’s checks made out in different increments. That way you will have a check ready to go as soon as you present a winning bid. Provided you have done your homework beforehand, you should have an idea of how much you are willing to pay at the auction. This method can also prevent you from overpaying, a feat that happens all too much over the course of aggressive auctions.
It’s important to note that REO departments associated with banks often handle hundreds of properties at a time. What’s more, it’s not uncommon for multiple buyers to compete over the same property. Cash instantly awards those who have it an inherent advantage over those that don’t. In offering cash for an REO property, you are automatically placed ahead of those that need to use traditional financing.
Buying bank-owned property with cash is almost always a great way to land a deal. However, there are several things investors can do to tilt the scales in their favor. Below you will find some of the best tips for buying bank-owned properties:
Buying bank-owned property with cash is important for real estate investors to get access to more deals. Hopefully learning about the bank’s processes, the structure of the deal, and how to buy REOs at an auction has given you the confidence to consider this type of investment in the future.