Buyer beware when purchasing distressed property

Buying a bank owned home might be a great way to get a great deal on your first home or the home of your dreams. However, you will find that buying a distressed home from a corporate owner is slightly different than purchasing a non-distressed home from an owner-occupant.

When you are purchasing a bank owned home, the bank requires you to sign addenda that favor the bank in many ways. Foreclosed homes that are sold by banks are exempt from many disclosures, including the Maryland Residential Property Disclosure And Disclaimer Statement (which discloses the home condition as well as any latent defects). Additionally, banks selling foreclosures (and their real estate agents) will sometimes want to take control of the entire transaction by coercing you to use their vendors, including their title company.

First and foremost, the bank is selling the foreclosure in as-is condition. This means that “what you see is what you get.” Often, what you don’t see is what you get as well. The bank addenda will warn of possible mold and other hazards that may be in the home. Even the best of homes can develop issues due to having utilities disconnected as well as being vacant for many months. A thorough home inspection, that may include testing for environmental hazards, is highly recommended to determine the condition of the home.

Another consideration in purchasing a foreclosure is that the bank will only offer you a Special (or limited) Warranty Deed. In a typical residential transaction, the seller will provide to you a warranty deed that guarantees that the seller has the ability to sell the home, and all debts held against the home are paid. However, buying a foreclosure is a bit different in that the bank will only provide a deed that covers the period the bank has had ownership of the home. Owner’s coverage title insurance will usually protect you from title defects not corrected by the bank; however, as policies vary, you should read the fine print.

Lastly, your deposit will become non-refundable after a short period of time. The bank will give you a short period for due diligence (obtain financing, conduct home inspection, etc); be prepared to act quickly!

So, is it a good idea to purchase a foreclosed home? Buying a foreclosure could be a real coup for you- but you must do your due diligence. Before you write an offer on a foreclosure, line up your vendors (such as home inspector, title attorney, contractors) so you can act quickly by having your team determine the home’s condition and legal status.

Unfortunately, the proliferation of distressed properties has some real estate professionals believe that consumer protection laws do not apply (such as RESPA and Maryland’s Wet Settlement Act). Make sure you are well represented! As a home buyer, you have the legal right to choose your vendors (including home inspector, title attorney, lender, etc.).

If you are planning to purchase a bank owned home, it is highly recommended that you review these special addenda carefully as well as consulting an attorney if you do not understand what these addenda require of you. Remember, “caveat emptor” applies when buying a bank owned home.

Original published at

By Dan Krell

This article is not intended to provide nor should it be relied upon for legal and financial advice. Copyright © 2008 Dan Krell.

How to buy a foreclosed home

by Dan Krell © 2007

With changes in the market, we have seen an increase in the amount of bank owned homes on the market. What’s happening? Foreclosure rates for the entire country are up over forty percent since last year (MSN real estate). However, in the Bethesda-Rockville area the foreclosure rate only increased above four percent and decreased in the Baltimore area. If you live in Northern Virginia, the foreclosure rate increased over fifty percent since last year.

Putting the numbers in perspective, although the numbers seem high for our area, the home owner behavior relatively the same. The difference is that those who are in trouble do not have the parachute of the expanding real estate market.

In the last few years, when a home owner fell behind in their mortgage payments it was almost assured they would be able to sell the home quickly and realize a net gain in their sale. If they were not able to sell and the home went to auction, hungry home buyers and eager speculators were ready to purchase sight unseen.

Boy has the time changed! First of all, many home owners who are in trouble with their mortgage are not in the position to sell as the home value is less than what they may have purchased the home for. Additionally, if they have some exotic mortgage, there is a good chance that the interest has eaten into any equity they may have had, in addition to late fees as well as attorney fees (the mortgage company will charge the defaulting home owner for the cost of foreclosing).

If you have fallen behind in your mortgage recently, you know that banks are becoming more difficult to deal with. I have heard stories from home owners who have been told by a bank representative that because there is equity in the home, the bank is looking to foreclose and resell at a profit. Have the banks become greedy?

No. The banks are the same way they have always been, looking for ways to make money. What has changed is real estate market and technology.

A year ago, a bank owned home on the MLS was almost non existent in the Montgomery County area. Today, there are over 25 active bank owned homes on the market just in Montgomery County. Among the listings are a couple of good buys.

Bank owned homes used to be priced for quick sales. Today, bank owned homes are priced at full retail prices, even though the condition is less than perfect. Additionally, the banks may not entertain a lower offer until the home has been on the market for a while.

Technology has been a driving force in the real estate industry for over a decade. As technology changes and gets better, the valuation models the banks use will also get better. Presently, I believe the banks and REO disposition companies have fallen behind in the curve such that the valuations they are using are skewed to because of higher home prices from last year.

As the market stabilizes, we will see an increase of bank owned homes for sale. Eventually, bank owned home prices will also find their mark as market conditions and home condition are taken into account. If you are in the market for a bank owned home, talk to your Realtor and keep an eye on the bank owned inventory.

This column is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of 2/19/2007. 2007 © Dan Krell.