Understanding a Bank Foreclosure
Back in the day, it was possible for buyers to easily spot a bank foreclosure a mile away. These homes were very often broken down, stripped abandoned buildings that looked like they are uninhabited. They often looked like they were on a set for a horror film. Today however, times have changed. A bank foreclosure is a different animal now altogether. The reason for that is because banks now choose to renovate their REO (real estate owned) property before they list it for sale and try to sell it. This change in procedure has prevented investors from making huge profit from the banks loss.
Nowadays, banks are very clever, and they have a much better understanding of the market. Banks know that it has significantly improved over the years. They don’t come across as desperate to potential buyers anymore. They have changed their strategy from trying to sell as quickly as possible to trying to minimize loss. This in the long run creates both risk and reward for buyers looking to buy a foreclosed home. To make the best decision possible you as a buyer need to weigh the pros and cons of purchasing a foreclosed home.
Advantage: They Can Be Cheaper
A bank foreclosure is still a cheap home to buy on the market, relatively speaking. On average they are roughly around 5% below their value, depending on the market situation your area is in. To put it plainly, depending on the market, you could buy a similar home in the same location that is not a bank foreclosure for 5% more. This has to possibility to give you some savings on purchase price. Keep in mind however that a discounted price will bring competition and could get you into a bidding war with other buyers.
Taking into account that banks are now renovating the home, you could end up with a very nice home in great shape. When the economy was low, it was possible to see foreclosures going for 15% or more below their true value. However they were in abysmal condition, and were stripped to the bone. They were sold quickly by the bank to get money back on their loss.
Bank foreclosure homes have a lot of money invested in them by the banks. This is because they want to drive the price up, and recover as much money as they can. This in turn means that the bank won’t be very flexible on price and negotiations, and won’t get as caught up emotionally. It isn’t in their best interest to make a quick sale. Banks know that eventually it is only a matter of time before somebody will come along that wants to pay the price they are asking, so the need to negotiate isn’t that great.
There are other risks involved as well. You don’t know the history of the home, and there could have been fire damage, mold or major leaks in the house. This is a major disclosure, however in most cases the bank doesn’t know any of these things either. They don’t know the history any more than you do. It is very important that you as a buyer diligently perform inspections to learn as much about the condition of the property as you can.
Disadvantage: Emotionless Entity
Unlike traditional sales, you aren’t negotiating with a person who might be sympathetic to you or your situation. Selling a home is an emotional process and most buyers and sellers get swept up on the emotion of selling their home. To a bank, the house isn’t a home, it’s an asset that needs to be sold for profit. It all comes down to money to the bank. Your offer will be run against the numbers and they will make a decision that way. It’s like dealing with a computer, not a person.
It is very important that you remember banks want the most they can get for the property. Banks aren’t as frivolous as they once were with a bank foreclosure. They most likely will not sell to somebody that wants to negotiate when there is another person that will pay top dollar. You need to be prepared to do inspections and look into potential problems with the property. Go in expecting some repairs or hiccups. And when all else fails, trust your real estate agent to help guide you through the process!