A mortgage lender tries to recoup its losses on a defaulted loan through a foreclosure auction. When an auction fails to fetch the lender's minimum bid price, the lender repossesses the home and puts it on the market as real estate owned by the bank, or an REO. When the home you want to buy is a foreclosed property, follow a few rules of thumb to ensure you get a good deal.
You can bid on a property in person at the auction or trustee sale, which might take place at the home, at the courthouse or even online. Bids, which are in writing, are legally binding. Sales are final for the total amount of the winning bid, so work with an agent or real estate professional experienced in foreclosure auctions.. You likely have to compete with savvy investors who pay in cash, so you need to be prepared to hand over a hefty deposit if your bid wins. You typically have to shell out 5 percent to 10 percent of the sale price as a deposit. You also need to have money ready to cover the full purchase price and closing costs, usually with a cashier's check. Bidding in an auction carries more risk than buying an REO, as you often have to waive the inspection and buy the home as-is.
A real estate agent hired by the foreclosing lender handles offers and submits them to the lender for review and acceptance. Lenders are notoriously slow to respond, so prepare to wait several days to weeks to hear back on your offer. You typically can walk through a home before making an offer on an REO and your offer price and contract terms can reflect the property's condition and any needed repairs. With an offer, the lender often requires you to submit a copy of your good-faith deposit, which usually equals 1 percent or more of the offer price; evidence of your mortgage financing, or pre-qualification letter; and proof of your down payment funds by means of an account statement. A lender may even require you to qualify with its preferred lender to ensure you can get a loan.
Due Diligence Rules
A lender can forgo many of the disclosure statements required of traditional sellers because of its limited knowledge of the home and its condition. For example, in California, lenders are exempt from providing a Transfer Disclosure Statement, which details a property's components and defects; however, it must provide the state-mandated Natural Hazard Disclosure Statement, which lists potential natural and environmental hazards. An REO agent may supply you with his own disclosures, but it is ultimately your responsibility to perform your due diligence. Real estate contracts contain inspection, title search and disclosure clauses that allow you a certain amount of time to research the home and back out of the deal. You must put these due-diligence conditions in writing before the lender accepts your offer to have a way out in case the property doesn't meet your expectations.
A lender can cancel and impose penalties if you fail to fulfill your contract duties, including gaining financing and closing on time. You jeopardize your good-faith deposit when you fail to comply with a responsibility by its agreed-upon date; the lender can keep all or a portion of the money as damages. For example, a purchase agreement typically states that you must have full loan approval and the appraisal completed by a certain deadline or the seller may cancel your agreement.
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