Buying Bank Owned

Over the past several years, there has been no shortage of foreclosures. Though foreclosures sales end with the property being sold to the highest bidder at auction, quite often, that highest bidder is the bank that is foreclosing on the property. After buying the property back at auction, the bank then lists the property for sale with a broker. In other cases, homeowners simply deed their house over to the bank, hand them the keys and walk away. Whatever the case, whenever buying from a bank, though there are many great deals to be had, the age old legal proverb still applies – buyers beware. While buying bank owned property carries with it certain risks, there measures you can take to minimize your and still take advantage of what can be an otherwise great bargain.

To understand the risks, you need to know how a bank owned sale typically works. Usually, you and your real estate agent go out and look at the property together and, if you like it, you decide to make an offer. Your real estate agent then prepares a standard form offer form that sets forth some general terms, such as your proposed price, down payment, and perhaps a financing or inspection contingency. Once you sign the offer sheet, your agent sends it over to the bank’s real estate agent. Soon thereafter, your real estate agent calls from her cell phone to tell you the great news, “Congratulations, the bank has accepted your offer.” Unbeknownst to you, however, the bank didn’t really accept the offer that you made. After verbally communicating with you that your offer has been accepted, instead of sending you back the signed accepted offer as you would otherwise expect in a normal transaction, the bank’s agent sends back your offer, unsigned, with an additional document attached to it that is usually labeled “Counteroffer Addendum.” You are asked to sign this new agreement and resubmit it to the bank as part of your initial offer. Commonly at this point, your eyes glaze over as you look at the so-called addendum. Not only is it several pages long, but trying to make sense of it can make your head spin. What kind of person would write such a document? Oh, right…

The Problem

First off, the bank’s addendum completely overrides any conflicting provision in the standard form offer and the standard form purchase and sale agreement. In effect, the bank’s addendum pretty much nullifies most, if not all, of the buyer protections contained in the standard form agreements prepared by brokers. What you are left with is a completely one-sided, oppressive agreement that protects the bank in every way possible. Their contract locks you into the agreement, but leaves the bank the option to back-out without consequence. Feel like negotiating? Too bad - the bank will not allow you to make a single change to their addendum.

While the substance of the bank’s terms are beyond the scope of this article, it suffices to say that the they have gone to great lengths to eliminate any rights you may have had to get out of the agreement or to get a refund of your deposit if you find any problem with the property. If you find that there is a problem in the chain of title, or if there are any zoning violations affecting the property, well you may be able to walk away from the deal – just don’t ask for your deposit back. The disclaimer language - “AS IS” - contained in a bank contract is so extreme that you can count on the bank keeping your deposit under almost any circumstances. So, if during the home inspection you discover a five foot hole in the wall that turns out to be a ghost portal into the netherworld, you will have two choices: back out of the deal and forfeit your down payment, or close the deal, cover the hole up with your sixty inch flat-screen and hope that the ghosts are Celtics fans. Either way, don’t expect the bank to give you your deposit back.

What can you do?

First, make sure you are getting a deal on the property. If the property is being sold for the same price as privately owned homes, then there is no reason for you to take on the added risk of buying bank owned. If you and your broker don’t think that you’re getting a great bargain, just move on. The bargain is what makes the added risk worth it (and it is often worth it).

Second, if you are buying bank owned property, the phrase “buyer beware” has never had so much meaning. Always have a professional home inspector look at the property immediately, and conduct other tests such as radon tests or water quality testing. There is often only a short window of opportunity to conduct inspections in a bank owned sale. If you do not take advantage of the short inspection period, any problems you find afterward will be your problems, not the bank’s.

Third, and most important, do not put down a large deposit. My advice is always the same. When buying bank owned, only put down a deposit that you can afford to lose. There are unavoidable circumstances that can, and often do, arise that can either prevent you from obtaining financing, or that prevent your lender from closing the loan before the date you agreed to in the purchase and sale agreement. Often these are circumstances that, in a traditional transaction, would entitle you to a refund of your deposit. Because you do not have the same protections that are ordinarily built into standard form agreements, problems with your loan, as well as many other pitfalls beyond your control, may lead to your being in violation of the purchase and sale agreement, resulting in the possible loss of your deposit. Therefore, regardless of the purchase price, offer to put down a relatively small deposit, such as $1,000. If all you have to lose is $1,000, even if you discover something that makes you want to back out of the deal, then look on the bright side, you’re out $1,000…not $20,000. In a traditional purchase, sellers like to see a buyer put down 5% or so of the purchase price so that the buyer has something real to lose if he walks away. However, so long as the purchase price is where the bank wants it, many agreements are being accepted by banks where the buyer puts down only a small deposit of $1,000 or $2,000.

Finally, and this may sound harsh, but do not expect the bank to exercise common sense or to treat you fairly. Actually, I highly doubt that you are shocked by that statement. Chances are, almost none of the properties that you will encounter are owned by local banks. Instead, you are more likely to be buying from a large national lender or Fannie Mae. In most cases, neither you nor your attorney, nor your broker for that matter, will ever have any direct contact with whoever is making the actual decisions on the other end. Forget common sense, this is not a common transaction, and much of the details will not make any sense, at least to those on the buyer’s side. Let me give you an example. Delays and the need for short extensions are quite common in a bank-owned purchase. Very often, buyers find themselves needing a two or three day extension to the closing date. More often than not, the selling bank is indirectly responsible for causing the delay leaving you in need for an extension. A common scenario is that your lender was unable to obtain an appraisal of the property in time to complete the approval of your loan because of the selling bank’s failure to provide timely access to your property appraiser. As a result, you find yourself asking for a very short extension to the closing date. Using common sense, you might assume that the bank is going to grant the extension instead of putting the property back on the market, and then paying the expenses and taxes to carry the property. Not to mention the fact that it was the selling bank’s fault you couldn’t get the appraisal done anyway. Fairness you say? Common sense? Forget it. There is a real chance that, without any reasonable explanation, the bank says no to the extension; tells you to take a hike, puts the house back on the market and keeps your deposit. Unfair? Absolutely. But regardless of who the seller is, if the seller that you are buying from refuses to sign a fair agreement, don’t expect to be treated fairly when it comes time to enforce the agreement. Buyers beware, to say the least.

Now that I’ve managed to spook you to the point that you might never consider buying bank owned, there is actually some good news. There are many bank owned bargains out there to be had. You just need to know that there are some pitfalls that go along with buying bank owned, and nothing comes for free. Before you submit that offer, regardless of what your well intentioned realtor advises, call a real estate attorney first. Make sure you know the risks and how they affect your particular situation. Minimize your risk. Know what you are getting into.. The more you arm yourself with information, the better your chances for success.