The housing downturn has meant that there are a lot of bank-owned homes for sale on the market. (Also known as Real Estate Owned or REO properties.) Successfully negotiating the purchase of a home that is owned by a bank is a process that requires patience and a different approach compared to buying a home from a private party.
Understanding the participants
When a bank takes ownership of a home through foreclosure, they will eventually attempt to sell the property on the open market. There are three key players in a bank-owned sale that you need to be aware of.
- Listing Agent – In the vast majority of cases, the homes get assigned to a local real estate agent who lists the home for sale on the local MLS and advertises on behalf of the bank. The listing agent’s job is to help the bank set their price, advertise the property and procure offers from buyers and their agents. Often these agents also facilitate ongoing maintenance and utility payments for the duration of the listing.
- Asset Management Company – Many banks do not want to be in the direct business of listing their properties, maintaining their properties or interacting with listing agents, so they assign their portfolio of REO properties to an 3rd-party asset management company. The job of the asset management company is to act on behalf of the bank to keep the property maintained and to get the property sold through their network of real estate agents.
- Asset Manager – The asset manager is either an employee of the Asset Management Company of sometimes a direct employee of the bank. These folks are given a list of properties to manage and sell and are the person who responds to offers and serve as the voice of the bank. They have varying degrees of decision-making capabilities on a particular property.
Initial listing process
Once a bank takes a property back through foreclosure, they have to decide when they want to list the property for sale. Sometimes the listing process begins as soon as the next day, but other times they may hold off for weeks or months to sell the property. It all depends on how quickly they want to liquidate the property and the overall inventory of bank-owned listings on the market. (They don’t want to depress prices by flooding a market with bank-owned homes.) Here is what happens during the initial listing process.
- Assignment to agents & property preservation vendor – The property is given to an asset manager who sends the assignment to a local real estate agent and property preservation vendors.
- Occupancy check and eviction – If the property is still occupied, the bank needs to go through eviction proceedings to remove occupants and their belongings. Laws and timelines vary state-to-state. In Washington state, the process can take 30-60 days.
- Trash out & sales clean – A foreclosure sometimes means homes that are filled with garbage or in poor condition. Banks will pay to have debris removed and for basic clean up.
- Valuation – The bank needs to know an estimate of the current market value of the home to set a listing price. They will use a combination of Broker Price Opinions (BPO) and appraisals to make this determination. On my own recent bank-owned listings, I have been asked to give a BPO value, a second BPO opinion was obtained from an unrelated agent, and a formal appraisal was completed. Using these multiple data points, the bank can determine the current market value so that they can set their price. Note that the process has NOTHING to do with what they lost on their previous loan. They know that they can only sell a property for the current market value. Banks do not make valuation decisions on a whim. They use valuations from multiple parties. Those valuations may not always be correct, but it is how they make their decisions.
- Listing – Banks set a listing price and tell their agent to list the property on the MLS. Banks’ motivations change over time. Some banks will price the property high in the valuation range, knowing that it will take some time to procure an offer. Others may be motivated for a quick liquidation and will significantly underprice a property to spur competition and an instant sale.
Constructing a successful offer on a bank-owned home
Successfully buying a bank-owned home requires that you understand the process and motivations of the bank.
- Money talks – This should come as no surprise, but banks are motivated primarily by their bottom line. They want to maximize their net proceeds from a sale, and will often not care so much about other terms like quick closings or a waived inspection contingency. If the bank can get 10k more from a buyer that has to wait 30 days for their mortgage to close, they are likely going to take that offer over a lower all-cash offer.
- Negotiation is mechanical – The negotiation process is highly automated. Your offer will be uploaded to a website with a summary of the key offer terms. Response from the bank comes back on the website, usually with no interaction or conversations between the listing agent and the bank. Nuance and lengthy descriptions are often lost or ignored in the process. They focus primarily on your offer price and terms.
- Decision makers are given parameters to work with – Asset managers are generally given some level of decision-making capability. They may not be authorized to sign contracts for the bank, but their job is to put together a contract that the bank can automatically sign without further negotiation. They are not going to tell you what their parameters are, but they may have the ability to negotiate 0%, 1%, 5% or 10% off the list price of the home. If you are within their parameters, they may say yes to your offer. If you are outside of the range, they will reject it. Their approval range does change as time passes, but you can be pretty certain that they don’t have the ability to give you 20%-25% off just a couple days after a new listing or price change.
- Bank motivation changes as time passes – Banks know that it takes time on market to successfully sell a home, but they also don’t like listings that stay on their books for hundreds of days. They generally re-evaluate their pricing and marketing every 30 days, using refreshed BPO data to determine any new changes in market values. Often you will see price changes happen on a monthly basis. Sometimes the price changes are gradual, and other times they are dramatic. I saw a recent listing where they made modest price drops at day 30 and day 60, and then they made a drastic price drop at day 90 that brought out 15 competing bids and sold the property instantly for way over their list price.
- You are a number – An asset manager is likely managing hundreds of properties at any given time. They want to sell them all expeditiously, but yours is no more special than the rest of them that they are dealing with.
- Patience & persistence – Negotiating with a bank requires patience and persistence. Listing agents are often overworked and unresponsive because they have so many bank listings. Banks only work during the business week and it can take a number of days for each response. They also won’t always give you their best price on the first round of negotiation. Be patient and work the process through to completion, even if you have to iterate multiple times over a couple of weeks. If they reject your offer now, wait for more time to pass and then rinse and repeat.
- As-is means as-is – Bank sales are sold in “as-is condition,” and in the vast majority of cases, they will not make any repairs to the property. The exceptions to this may be safety or loan-related issues that they need to fix in order to sell a place. i.e. They will likely have to install a missing furnace, but they are not going to replace the nasty carpets. There is no harm in requesting repairs, but you should go into a bank-owned transaction assuming that they will fix nothing. They hear the same begging and pleading from every buyer out there, so your request needs to be substantial for them to consider it.
- Live with the bank contracts – Every bank is going to have their own contract or contract addendums to sign. Most of the terms are straightforward, but sometimes the contracts are slanted in the bank’s favor. You need to understand what you are being asked to sign and should seek legal advice if necessary. But remember that your chances of getting a Bank of America or Wells Fargo to make an contract change just for you is zero.
- Skip the flowery sales pitch – When buying from a private party, you may include details about yourself like why you love the house, your great job, or other personal details. Banks could care less, and may not even look at your fancy letter. Focus on price and terms.
- Competing offers – Bank-owned homes may come on the market at extremely low prices that bring out multiple bidders. If you are competing with other bidders, you will be asked to submit your “highest and best offer.” This means exactly what it says, which is to give them the highest number you are willing to pay for the home. You will likely have little or no information about your competitors, and you may not use escalation clauses. It is unnerving, but you need to work with your agent to determine the highest price you are comfortable with for the home. Price still wins in most cases, but terms like financing and closing dates do matter when pitted against other similarly-priced offers.
There are good deals to be had when buying a bank-owned home, but you need to understand the process and the players in order to successfully make it through the process. Consulting a real estate agent that is experienced in bank-owned deals can be helpful in the process.