BUYING BANK-OWNED PROPERTIES PAINFULLY SLOW BUT POSSIBLY REWARDING

Last week we talked about the flood of bank-owned homes that have clogged up the residential resale market both nationally and locally. These "post-foreclosure" houses are the harvest of the exotic financing instruments and the loose lending guidelines of recent years.

In many cases, the buyers intended to make the payments, but were overwhelmed by dramatic jumps in interest rates as their adjustable loans reset. Unable to pay the required sums monthly, these owners may have tried to sell. But with little or no equity in the homes, their efforts were to be in vain.

After a meaningless foreclosure auction where no investors even attended, these homes were deeded back to the lenders, who list them with local real estate professionals for sale. Banks call these houses REO properties, which stands for "real estate owned."

Yes, the savvy real estate buyer can pick up a bargain, but it's important to be cautious when shopping for these "bank-owned" homes.

Here are some questions I am often asked:

Q: What's the difference between making an offer on a "bank-owned" house as opposed to a typical resale home?

A: The primary difference involves recognizing the challenges of dealing with an institutional seller.

For starters, a traditional seller would first get their house in clean, ready to sell condition. Only then would they open the doors to the public. Further more, most sellers expect a buyer to request a comprehensive inspection, and are not surprised when a buyer requests compensation for needed repairs.

In contrast, banks expect to sell their REO properties "as-is," and they almost never agree to make repairs or put the property in any condition other than the way it is. The bank will likely grant your request for an inspection, but will almost certainly decline any request for improvements.

Q: Are all these REO houses in extremely poor condition?

A: Some are in almost perfect condition, while others are completely unfit for human habitation.

In addition to being poor sellers of real estate, banks have a bad habit of being poor property managers during their period of ownership.

Because the house is vacant, it attracts vagrants and homeless people who move in and semi-occupy the house. In cold weather, these occupants may build fires in the fireplace to keep warm, and they sometimes break up kitchen cabinets to use as firewood.

In addition, as time goes by, these homes often sink into much worse condition. Thieves steal copper pipes and copper wiring to sell for recycling, and air conditioning compressors disappear overnight. Even so, the banks hope to sell these homes "as-is."

Q: How do I go about making an offer on one of these houses?

A: Here is the next hurdle.

When looking at a typical resale house, you can expect the seller to respond to your written offer in hours. They may counter, but today's seller takes every offer seriously, hoping for an eventual meeting of the minds.

Banks do things differently.

When you submit a written offer to a bank, they frequently demand proof from your bank that you have sufficient funds on hand to close the transaction. This must be submitted before the bank will even look at your offer.

Another frequent requirement is acceptance of multi-page addendums freeing the bank from any liability for the condition of the property involved.

Even after all that, my experience is that most banks have trouble finding anyone with the actual authority to make a decision on selling the house. While some lenders are better than others, it is not unusual for offers to sit on the table for a week or more before someone at the bank gets around to responding.

Q: Any other pitfalls to watch out for when buying from lenders?

A: First, know that this seller is unwilling to give you a General Warranty Deed for the property when you buy. They will insist on delivering title by Limited Warranty Deed, thus preventing you from involving the bank in future title problems. To remedy this shortcoming, it is especially important that you purchase the optional Owners Title Insurance policy from the closing attorney.

Also, when selling REO houses, most lenders insist that you pay for settlement costs, and further require that the closing take place in the office of the seller's attorney. If you want legal representation (and you do), you will have to pay for your own attorney to review all your documents and advise you directly. In my opinion, that is money well spent.

Q: It would seem that the banks would be anxious to sell these properties, and would want to streamline the process, making it easy for buyers. Why all the roadblocks?

A: Banks and lending institutions are heavily regulated, and have internal rules and regulations that must be followed. In addition, its part of a corporate culture permeating the world of banking.

Banks just aren't set up to sell real estate. They protect our savings and process our checks and loan us the money we need most of the time, but marketing real estate is just not one of their strengths.

Q: What about buying government-owned houses from HUD? Is that any easier?

A: Unfortunately, it's worse. The government has its own procedure for selling, involving a prioritized bid period during which only owner-occupants may bid. And even if you intend to live in the house, you must accept it in as-is condition.

The bottom line in buying any foreclosed property is to make sure you protect yourself at every step, and have your attorney review all documents with you carefully before you sign anything.