If you are new to the blogs here, please read the post on getting a mentor. For those who are following blog after blog, please pardon my insistence on this in every post. To me it’s crucial that people who want to invest in real estate, get a mentor first. There’s only so far a book on “How to Swim” can go.
We talked briefly about HUDs and bank foreclosures before. The process of bidding is quite a bit different between the two. Let’s talk about making an offer on a bank foreclosure first.
Making an offer on a bank foreclosure:
At this point you must be working with an agent already – or your mentor has a real estate license and is able to communicate with the selling party and represent you. In Texas, there’s a form promulgated by the state of Texas that you use to make an offer. You may meet with your agent and fill this form out, or your agent may send you a blank form and you fill it out yourself. You may want to create several copies of a template form, so that you can quickly fill it out when needed. Remember, time is of the essence when making an offer. Good deals don’t last.
Unfortunately, most banks don’t give you a method to bid online. It’s all paper. However, you don’t need to fax anymore. You can scan and email your agent and your agent can do the same to get it to the seller. The same document is scanned and printed and signed and scanned and printed and ….round and round you go. So make sure the first draft is very legible. I like to use a black, sharp, dark ink (not for HUDs. I will explain later). Avoid faxing as the quality deteriorates pretty quickly.
Offer Amount: So you already know how much you want to bid for the house. If it’s priced well already, do not low-ball. Your agent and mentor should help you price the house correctly. Look at days on market for the property. If it’s new and priced well, you must be competitive with your offer. If it’s been on the market for a while, you can go in lower, but most likely the reason it’s still on the market is because they are not accepting low offers. So it might be better to just wait till they lower the price. If you have done all the prep work, you can be quick when they do lower the price.
Earnest Money: This is called consideration. This makes your offer real. The more this is, the more real you appear to the seller. For a non-foreclosure sale, human sellers expect to see around 3% – broadly speaking. For a bank foreclosure (in the price range we are talking about), 1% or $1,000 is usually sufficient. In some cases, $500 may be good enough. This money is usually required to be obtained in the form or cashier’s check or money order. A copy of this is usually sufficient when you make the offer. If your offer is accepted, your agent will collect the original from you and get it delivered to the selling party or whoever is holding the escrow. The money will be applied to you at closing. If you back out of the deal (after you exit the option period), you may lose this. So keep it large enough to be real but not too large that you feel compelled to go ahead with a bad deal simply because of your earnest money.
Closing Costs: You can ask the seller to contribute some amount towards your closing costs. Normally the maximum seller contribution towards closing costs is 3% of purchase price. However, many banks require an internal authorization process to be followed to release money towards buyer’s closing costs. So you may want to keep this to a minimum. When I talk about the various financing options (in another post), I will tell you what to do if you don’t want to spend your liquid cash towards closing costs.
Title: You will get clear title when you close. You can ask the seller to pay for owner’s policy of title insurance. Most banks will not pay for survey and won’t have one on file. So it’s better to get a new survey at your expense. Even if they have a survey on file, it’s better to get a new survey (I’ll go into the details in another post). In most cases the bank will choose a title company.
Seller’s Disclosure of Property Condition: In a bank foreclosure, the bank is not required to furnish a seller’s disclosure. Now, here’s the deal: Obviously the bank hasn’t “lived” in the house and so they may not be aware of latent defects like slow drains or leaks when it rains. Also, there’s no need for them to disclose obvious defects that are apparent to the untrained eye. So, to me the seller’s disclosure is of limited value anyway. I trust my eye and the opinion of professionals. What you can do is to ask your agent to ask the bank’s agent if they have prior inspection reports. Agents are required to disclose material facts about the property. Just because it is a foreclosure does not mean they cannot give you an inspection report they have on file. Always ask.
Closing date: Pick a closing date as early as possible. The sooner the closing, the stronger your offer. You are dealing with a bank’s distressed asset. They are not wanting to time it “till they find their next house”. So close quickly. The time it takes for your loan details to be flushed out is the main factor in determining your closing date. You must stay on top of your loan process and make sure it’s not running into any delay.
Addenda: You will invariably have bank addenda paper work to sign. These are drafted by the bank’s attorneys and not promulgated by the state, unlike your offer. So, review it and if you don’t want to sign something, discuss it with your agent and your mentor. They will be able to tell you how “standard” an addenda is. Many of them just stem from what Fannie Mae and Freddie Mac, “the backseat drivers”, want. Mostly they are drafted to protect the bank and the seller and not necessarily to do you harm or take advantage of you but it might read that way.
Option Period: This is important and I may dedicate a post to this. In short, this is your inspection period. Per the Texas offer contract, the buyer has “unrestricted right” to terminate the contract within a stipulated period after providing the seller with due consideration. Now, several bank addenda limit this right to reasons of property condition only. Some will go as far as stating – property condition not apparent – and will require a professional inspector’s findings. Be very clear about your rights to terminate. The option period typically begins after the contract is executed – which means parties have agreed to written terms and have exchanged signatures. However, some banks say that option period begins as soon as verbal acknowledgment of your offer has been communicated to you. On your part be ready with your inspections lined up. I should really write another post on this.
Attorney Consultation: When you invest in real estate, you will develop a team that you work with. Your team will have an attorney. If you have specific questions about the contract, you should consult your attorney. Real estate agents cannot give you legal advice. Neither can your mentor, unless he or she is an attorney knowledgeable in Texas Real Estate Law. I think the contract promulgated by the state of Texas makes the whole process easier.
Pre-Approval Letter: Include your pre-approval letter with your offer. Sometimes, banks will ask for the pre-approval to be from their bank itself or some other specific lender. You may not like this as it requires you to share your financial information with people you may not want to share it with. However, you may not have a choice. You may be able to go in with one pre-approval letter and if your offer gets approved, they may require their designated lender’s approval letter to proceed. You may not want to disclose the maximum amount you are approved for, just enough to cover the purchase price.
