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Bank repossessed homes: buyers worst case scenarios

If you are searching for a new home, then you have probably seen bank repossessed homes in local real estate listings. These homes may be listed below market value, however, they have many disadvantages.

bank repossessed homesIf you are searching for a new home, then you have probably seen bank repossessed homes in local real estate listings. These homes may be listed below market value, however, they have many disadvantages.

Bank REO properties

When a bank forecloses on a home, it typically tries to sell them at a public auction. When homes do not sell at auction or receive bids that meet the minimum reserve price, then the bank continues to try to sell them outright. Bank-owned houses are referred to as real-estate-owned (REO) property. If you're looking through the real estate listings and see an REO in the listing, a bank or other mortgage lender typically owns the property. Homes owned by the U.S. Department of Housing and Urban Development (HUD) are also considered REO properties, but they are not always intermixed with other real estate listings.

Get foreclosure listings, including REOs, here.

Normally, banks do some due diligence on these homes and must disclose problems with the properties. Banks also typically clear liens on REO property titles. However, many lenders own hundreds or thousands of bank repossessed homes, so the proper research may not be done on each house. You should consider a few worst-case scenarios before making an offer on a bank-repossessed homes to mitigate the risk of a potential home buying disaster.

This comprehensive guide on buying homes in foreclosure discusses buying at auction, the importance of inspections and why you should line up financing prior to shopping.

Title liens

Liens on the property title are a major issue because they become your problem when you buy the home. Liens may be from back property taxes, unpaid homeowners association fees and other issues. It's also possible another mortgage exists on the home that the foreclosing bank didn't know about. If the second lender discovers the home has been resold, that lender can seek repayment from you.

Property damage

Property damage is another possible problem with a bank repossessed home. The bank selling the home may not be completely aware of home damages from the previous owner or because the property sat vacant for years. The bank's only interest is getting as much out of the home as possible. Whether the home was a single-family dwelling or a meth lab is of little interest to the bank.

Occupied home

The home may also be occupied. Although former owners are legally supposed to vacate, many will put off moving or refuse to move. In same states, these people can claim squatter's rights. In these instances, new owners of bank-repossessed homes have to file eviction orders to force the former residents to move. This process is unpleasant, time-consuming and expensive. 

The best way to prevent these worst-case scenarios from being your problem is to inspect the home before you make an offer. You also want to do a title search, or ask the bank for a title search, so you know the property does not have any outstanding liens. This due diligence ensures you are aware of any issues with the bank-repossessed homes before you make an offer. It may also be a bargaining tool if you discover the home needs costly repairs. For a list of foreclosed homes in your area, go to Reply! for free real estate listings.

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