Buying
Bank Owned Property
With the record number of foreclosures there are large
numbers of properties in Colorado that have been foreclosed and are owned by
mortgage lenders. These properties are commonly referred to as “bank owned
properties”.
There is a perception that one can purchase a bank owned
property at substantially under market value. This idea is driven by the belief
that mortgage lenders are desperate to sell these properties.
Reality is different than perception, as rarely can a
bank owned property be purchased for a price substantially under market.
At best, the purchase price will be 7% - 10% of true market value. And in high
demand areas, the end sales price usually comes very close to market value.
The reason is the real estate market is too efficient to
allow for an under-valued property to sell at an under-valued price. Besides
regular homebuyers who are looking to purchase a property as their home, there
are many real estate investors who are watching the market each day. When an
under-valued property hits the market, purchasers rush in to bid up the price.
It
is important to understand what is meant by “market value”. This is the
current value of the property based on recent sales of comparable properties in
the same neighborhood. Market value takes into consideration the property’s
specific characteristics and physical condition. Most importantly, market value
reflects recent changes in market conditions in the neighborhood.
Certainly there are some bank owned properties that can
be purchased for far less than the market price. But these are usually
properties in extremely poor condition in very low demand areas that will have
very limited appreciation.
Probably the best opportunity to purchase a bank owned
property at substantially under market value exists with the higher priced
properties – over $750,000. There are far less investors who participate in
this price range, which takes a lot of potential buyers out of the market.
An important consideration when purchasing a bank owned
property is the condition of the property. In many cases, these properties are
in poor condition. And the mortgage lenders usually sell them “as is”, and
will not perform any repairs. The cost of making the property “livable” has
to be contemplated, especially if you are looking to occupy the property as your
home.
The condition of a bank owned property could also prove
problematic when attempting to obtain financing. Mortgage lenders have become more attentive to the condition
of property before granting a loan. If the property has a condition that affects
livability or safety, the lender will require this condition be corrected prior
to closing. This creates somewhat of a “catch-22” if the bank selling the
property refuses to make repairs.
There is also the “frustration factor” to purchasing
a bank owned property. When you attempt to buy a property from a private party
or builder, you can expect to receive a response from your offer in 48 hours or
less. With a bank held property, you are lucky if you receive a response to an
offer in 2-3 weeks.
The punch line if you are considering the purchase of a
bank owned property – you might get a “deal”, but probably not a
“steal”. And even the potential deal will most likely come with some
aggravation.
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