Buying from a Bank vs. Buying from a Traditional Seller

In the past year, almost 75% of the homes and properties I've previewed on behalf of my clients have been bank-owned foreclosures. Of course, this is due to a major shift in the inventory given the current economic and housing crisis, but it probably also has a lot to do with the fact that my clients only want to see these foreclosures because they are priced so low. Because of this, many of my clients have also asked me for advice so they can understand what the "real, practical" differences are between buying from a regular seller as opposed to the bank. Here are my thoughts on this:

Before Offer
This is the period before the offer, when you're doing research or considering properties to write on. The main differences between foreclosure properties and regular properties during this time are that foreclosure properties are usually priced much lower than homes priced by sellers. This makes sense. Private sellers generally have the mentality of "let's get that one special buyer who will pay a premium for our property." Banks run more like an emotionless machine: "Let's price it at our bottom line, get multiple offers, and liquidate our inventory fast."

Forclosures on average generally are priced lower. However, it is important to also realize that, as with any capitalistic system, incentives (like, in this case, low pricing) creates stronger demand. With well priced foreclosures, you can almost always expect a bidding war, and if you want the property, you will probably have to make a best and final offer that needs to be over list price.

Foreclosure properties also tend to have more deferred maintenance. People who are maintaining and remodeling their homes generally don't stop paying their mortgages. It's usually people who can't afford to do any repairs that are. Therefore, homes that are owned by the bank are generally in worse shape, vacant, and dirty. As a buyer, you must have the imagination to vision past this.

Finally, foreclosure properties are usually always on lockbox.

During Offer Negotiation
This is the period from when you decide to put an offer on the property until you have an accepted offer. This period can be quite frustrating for buyers who are not familiar with how banks operate.

When you are buying a home from a private seller, they will generally do their best to work with you to create a win-win during the negotiations. They understand it is in their best interest to keep you, the buyer, in a good mood during negotations. Banks are much more impersonal.

Specifically, private sellers will usually counter with a clean written counter that addresses specifics. They will do so in a timely manner and you will likely get the sense that they are working in the spirit of compromise to make a deal. Banks are less concerned with keeping you in the deal as they are recovering their loss. They can counter however they want, and often times as a buyer, you will find the process much colder and almost as if they don't want to work with you. For instance, the bank may respond to your offer the following ways:

1) A Straight verbal rejection (If you submit a lowball offer to a bank, expect a straight verbal rejection)
2) A verbal counter
3) A counter for your best and final - no mention of them coming down on price
4) Bank counters to you at their full list price or almost full price - forcing you to either come up or walk away.

More often then not, the counter will be exclusively about price. And more often then not, they will just ask for your best and final.

The reason they only counter on price is because banks also have what we in the real estate industry know as a "boiler plate" addendum that you will need to sign as part of the acceptance that lays out THEIR terms. This addendum lays out all the terms of the contract for you, and supercedes any offer you may have put in previously. You can not adjust any of them, and they generally favor the bank heavily.

For instance, if you found a great property and offered $400,000 with a 17 day inspection contingency period, they could counter you back best and final. Say the list price was $450,000, and you told your agents you'll come up to $450,000: The bank would say, "OK. We have a deal. We'll send you the addendum with the price of $450,000. Just sign and we'll be in escrow." This means you have a deal, but in order to have the deal in writing, you must sign the banks addendum, which likely says inspection contingency shall be 7 days.

With the boilerplate Addendum, be aware of the following common changes:
1) Shortening of contingency periods.
2) Changing contingency removal from active to passive.
3) Per Diem penalty if you are not able to close on time
4) Penalty if you change your financing down payment amounts (even if you are able to close).
5) They will not pay for Termite work or retrofitting work.

The boilerplate addendum is non-negotiable. If you try to cross anything out, the bank will pass on your offer. As California real estate agents, we are expert in C.A.R Forms primarily. Legal addendums drafted by banks are outside the realtors scope (with the exception of Realtors with law degrees). Therefore, with bank owned properties, for your protection, it is also advisable to have a lawyer who specializes in real estate law review the bank addendum prior to signing. Unfortunately, realtors are not qualified to advise on these documents.

During Escrow and Beyond
In a traditional sale with a tradional seller, escrow will generally be opened immediately with a standard escrow company. With a foreclosure, it may 7-10 days before escrow is opened. Furthermore, banks tend to opt for low-rent, high volume escrow companies. How does this effect you:

1) You will have trouble getting someone on the phone when you need assistance on loan docs, ordering homeowner's insurance, getting necessary disclosures like preliminary title report or a copy of the Natural Hazards disclosure.
2) They will not keep track of timeframes on your escrow to make sure things are happening according to schedule. It will be up to you and your agent to keep track of them.
3) You loan is dependent on a number of things happening on a timely manner from escrow's end. If this does not happen, you can expect the bank to charge you a hefty per diem (around $125 a day) upon closing.

Once you have an accepted offer, a traditional seller will fill out a number of disclosures that will reveal as much as that seller knows about the property. Banks are excused from having to fill these out because they have a limited knowledge of the property.

During escrow, most buyers will do inspections on the property. If there are hidden defects with the property (i.e. the sewerline is cracked, Chimney doesn't work), most buyers and sellers will work together to find a reasonable credit to address the issue.

With bank-sold foreclosures (and per the boilerplate addendum), you are buying the property "As-is". Keep in mind, this is important as foreclosure homes are usually in much worse shape than homes sold by traditional sellers.

All this said, it is possible to negotiate for repair credits from the bank if (a) you have a strong offer that they probably wont get again, and (b) you have a willingness to walk away. I cannot stress "(b)" enough. With foreclosures, the bank generally will be unwilling to give any type of credit, until they see you cancelling escrow. You must be willing to walk away if the credit for repairs is that important to you. Otherwise, just accept that you are buying the property as is.

One common misconception, is that bank-owned properties take longer to sell or have delayed escrows. I would say it is actually the contrary: Bank-owned properties are pushing for fast closes, and will penalize you if you cannot close within the standard 30-40 day time window.

The properties that do take a long time and have delays are "short sales": A situation that happens when a traditional seller is trying to sell their home, but requires the involvement of the bank because the home is worth less than the amount of debt that is owed on it.

Please feel free to comment or email me if you have further questions. Thanks!

-Jerry