So, you'd like to buy a Bank Owned Property?

100 Real Estate & Relocation Tips in 100 Days (Day 49)

There are some really good reasons to buy distressed property; however, there are a few things the average consumer should understand before making the attempt.

Let's begin with an understanding of the terminology:

The properties that banks own are generally properties that have been through a foreclosure process, and the bank offered the high bid on the defaulted mortgage. In some few cases, the bank may take the property with a deed in lieu of foreclosure, but that does not happen much today. In any event, banks do not want to own non-performing or distressed properties, and make every attempt to sell it as soon as possible. These properties, also known as REO's or OREO's (Other Real Estate Owned) represent a financial drag on the banks ability to stay in business, so divesting quickly will often represent a great deal for qualified buyer.

Banks do not always mean banks, but really are better described as financial institutions. OREO properties could be owned by commercial banks, investment institutions such as FANNIE MAE, or the FHA, or private lending organizations. In many cases these properties are managed and sold by servicing companies whose business it is to sell distressed property. WE will use the term bank because it is convenient.

There are NO consistent rules or procedures that the buying consumer can rely on when purchasing distressed property. Every situation is different, and Realtors and state real estate commissions have no influence with the selling entities.

Short Sales are not banked owned (OREO) properties. Rather, they are properties that an individual consumer is trying to sell for a price less than the outstanding mortgage balance, hence the term "short payoff", or short sale. A bank may accept a short payoff is the bank feels that such a payoff is more financially advantageous than initiating a foreclosure proceeding. From the banks point of view, it is strictly a matter of the best financial outcome for the bank.

It should be obvious that a consumer is better off negotiating with a bank than with and owner attempting to sell a property short of the payoff. With OREOS, or REO's, the bank is the owner, and the decision to sell at certain price is the decision of the bank alone. With a short sale, the owner cannot agree to a final price without the approval of the mortgage holder, which may not happen, and certainly not quickly. Some short sales have taken as long as 6 months to process and close, where the average REO is 4-6 weeks.

It may be worth it to attempt to buy a short sale offering, it the price offered is reasonable against the overall market, and the buyer has no time constraints. Making a really low offer, even if accepted by the seller, is usually a waste of effort, because the bank will not approve any sale that does not make financial sense for the bank.

As far as to distressed properties being a "good deal" for the buyer, that is debatable, and certainly very situational. Many distressed properties have deferred maintenance issues; such issues may cost a buyer more money and time then if the buyer just purchased a well cared for home at a higher price. In today's market, many would be sellers are not entering the market because they do not wish to compete with distressed sales, so non-distressed properties are forced to be competitive with the foreclosure-short sale market.

Extreme care should be exercised by any consumer not experienced in buying distressed property. Make certain that a thorough inspection of the property is performed, and obtaining repair bids form a contractor is prudent. It may be prudent to have legal counsel review contract documents, and be certain that the title is clear.

Some good deals are out there, but the consumer must be prepared, patient, and attentive.

Subscribe to Denver Dwellings