Bank owned homes arise through two pathways; A Trustee Sale or a Deed in Lieu of Foreclosure. If a third party does not purchase the home in a Trustee Sale, the home reverts back to the lender, i.e. the bank, Mortgage Company or private lender. A Deed in Lieu of Foreclosure allows the Bank or Lender to take back the property without the expense of the foreclosure process to the seller, basically “giving the property back to the bank”. To eliminate confusion, “foreclosure” homes, bank owned” homes and “Real Estate Owned” (REO) homes are synonymous with one another.
Once the Bank takes ownership of the property, the home is usually managed by the bank's “Asset Manager” or their REO Home Department. The asset manager or REO Home Department is responsible for assessing the value of the property, determining if there are any repairs needed to the home and ultimately, selling the home at fair market value.
When writing an offer on a bank owned home, the buyer must have a “pre-approval letter" from their lender, indicating they qualify for the home. An earnest money or "good faith" deposit is needed, which will be held by the Realtor until the offer to purchase is accepted. Upon acceptance, the buyer will then be required to sign additional paperwork generated by the Bank. The paperwork or Addendums include, but are not limited to, an “As-Is” addendum stating the bank will make no repairs, outline the time frames for the inspection of the property, as well as the ramifications of cancelling the contract. Should the buyer uncover unanticipated problems with the home, the Addendums will clarify what happens to the earnest money if said buyer wishes to cancel the contract. Addendums also will state the financial penalties or “per diem charges” if the buyer does not close on time. These charges can amount to additional closing costs for the buyer.
The Bank does not provide a history pertaining to the condition of the property or any of the typical disclosures normally found in a real estate transaction. In real estate, the history is referred to as the ‘Residential Seller’s Property Disclosure Statement’ or SPDS. Additional disclosure documentation that the buyer will not receive is a homeowner’s insurance claim history. Previous damage to the property such as roof leaks, non-permitted room additions, mold damage or mold remediation, and general knowledge of the home and neighborhood are but a few of the vital pieces of information generally not provided in a bank owned home transaction. It is the buyer’s responsibility to perform all inspections within the time frame allotted, and at their expense.
Once the offer and all addendums have been signed and agreed upon by all parties, earnest monies are deposited with the Escrow/Title Company. The Escrow Company is responsible for research of additional liens on the property, pro-rating property taxes, providing the buyer with the HOA rules and regulations (CC & R’s), and issuing Title Insurance to protect the homebuyer from recorded and unrecorded liens associated with the home.
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