Q: A guy at work just bought a foreclosed home from a bank. He said he got a great deal, but this seems a little risky to me. What are your thoughts?
A: Bank-owned homes, also called real estate owned (REO) properties, are offered for sale after foreclosure has been completed and the mortgage lender or other entity such as HUD or the VA has received legal title to the property. Mortgage lenders are not in the business of selling homes, and maintaining inventories of foreclosed homes is costly. That said, sellers of REO property may put minimal work into these homes and usually sell them in as-is condition.
Buying foreclosed homes can be considered a "buyer beware" transaction, as any repairs are usually the buyer's responsibility.
If you're considering buying bank-owned home, it's a good idea to invest in a professional home inspection, even if you're planning to renovate the place yourself. The home inspection report may uncover problems that aren't visible during a typical walk-through viewing or casual inspection of the property.
It's also be worthwhile to hire a buyer's real estate agent familiar with REO properties. The actual sale procedure is different from a traditional home sale in that the seller is an organization that may have policies and levels of approval required before your offer can be accepted. Real estate pros who specialize in bank owned homes can help guide you through the entire process.
If you plan to buy a damaged property for renovation, be aware that FHA offers a home renovation loan through its 203(k) loan program. Loans approved under this program cover both renovation costs and your purchase of the property based on the as-repaired value of the home. This eliminates the need for a construction loan and a mortgage, and could be ideal for purchasing an REO home.