Buying a house from a bank doesn’t work like buying a house from a private party. But if you know the differences, a bank owned property can be an excellent opportunity.

Short Sales vs. REO
REO stands for Real Estate Owned, and is another way to refer to a bank owned property. This is property that the bank has taken back through foreclosure. Sometimes a seller who is behind in his payments will attempt to sell his house before it goes into foreclosure. To do this, you must negotiate with the bank to accept less than what is owed on the property, and this is known as a short sale. This page describes purchasing an REO, not a short sale which is altogether different.

Exempt From Disclosure
Whenever anyone sells a house, he must by law give the buyer a Disclosure Statement. This document describes any known issues with the property, and other legal and environmental disclosures. The seller has to tell you about any defects he knows about, especially if they are hidden and you might not see them. The seller can be held liable for defects that appear later that were not disclosed when you bought the house.

An exception to this law is an REO. Banks are exempt from giving you a Disclosure Statement. For this reason it is absolutely imperative that you do a thorough inspection with a licensed inspector before purchasing any REO. You must be extra diligent in all your inspections, because you have no recourse after you buy it. Also, unlike with a private seller, there will most likely be no chance of a bank being willing to make any repairs. You will be buying the property "As Is". Make sure you have an "Out" based upon the results of the inspection report.

Verbal Counters
After the initial offer is made in writing, counter offers may be made verbally until agreement is reached. This can be a slow process because the bank may be in a different time zone, or the responsible people are tied up in meetings. It may be many days of verbal countering before a final agreement is signed by all parties. During that time, there is a danger that another offer will come in better than yours and the bank may accept it. This is especially likely to happen if negotiations go over a weekend. So my advice is: try to reach agreement with the minimum amount of counters.

Higher Deposits
A bank may require a higher good faith deposit than a private party would. You may need to write a check for 3% to 5% of the purchase price when making an offer.

Double Loan Applications
The bank may require that you get prequalified with their institution within a few days of accepting your offer. They naturally want to cut their losses on the property by making a new loan on it. You may need to go through the loan application process with them, even if you intend to get the loan somewhere else. While they can ask you to apply with them, no one can tell you where to get a loan. That is your choice entirely.

Bank Chooses Services
The bank will insist on an escrow and title company that they choose. They have previously negotiated fees with these companies, so they know what their expenses will be. You would think that to get the business of these giant banks, these escrow companies must be really good. But you could be wrong! They may get the business by charging less, and the service could be substandard. For this reason, it’s most important to choose a real estate agent who is willing to work harder than normal to watch out for your best interests.

Not The Usual Contract
The bank will use their contract, not the standard RMLS form. It’s critical that your agent (and I suggest also your real estate attorney) read every word of this contract to make sure your interests are protected. Remember the bank’s attorneys who wrote the contract are representing the bank, not you.

Double Check Everything
Listing agents and escrows for the banks can be overloaded with work. Repairs may get ordered, and there may not be a follow up to see that the work was done. Your agent must take it upon herself to double check everything and assume nothing. When you buy an REO, make sure you select an agent that represents you and not the bank. Also, select an agent that is not afraid of the extra work it's going to take when you purchase this type of property.

Good luck and may you find an excellent bargain!  Now go find your dream home!