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. Here’s what I’ve learned from representing many buyers in purchasing bank owned properties.

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 report describes purchasing an REO, not a short sale which is altogether different.

Exempt From Disclosure
Whenever anyone sells a house in Maryland, they must by law give the buyer a  Disclosure or Disclaimer Statement. This document describes what is included in the house, what is broken, 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.

The exception to this law is an REO. Banks are exempt from giving you a Disclosure. For this reason it is absolutely imperative that you do a thorough inspection with a licensed and bonded contractor before purchasing any REO. You must be extra diligent in all your inspections, because you have no recourse after you buy it.

Verbal Counters
After the initial offer is made in writing, counter offers are made verbally until agreement is reached. This is 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. Expect to write a check for 3% to 5% of the purchase price when making an offer on an REO.

Possible Double Loan Applications
The bank will probably require that you get pre-approved 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 will need to go through the loan application process with them, even if you 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 may insist on a settlement 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 would be wrong! They get the business by charging less, and the service is often substandard. Many times the agents do the job of the settlement officer. For this reason, it’s most important to choose a REALTOR who is willing to work harder than normal to make sure you get the house you want.

Not The Usual Contract
The bank may use their contract, not the standard Maryland Association of Realtors form. It’s critical that your agent 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
I’ve found that listing agents and settlement officers for the banks are overloaded with work. Repairs may get ordered, but there is seldom a follow up to see that the work was done. Your agent must take it upon himself 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. Select an agent that has experience working with banks and is not afraid of some extra work so you’re protected.