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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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