Buyer's Guide to Purchasing Bank Owned Property - Inspections

DANGER NUMBER 1 - INSPECTIONS

One of the nice things about buying an owner occupied property is that the Seller usually provides a “Seller’s Disclosure” of the property.  This “Seller’s Disclosure” is a checklist of all of the main components of the house and the Seller’s disclosure of the condition of these components.  Often any work that was recently completed at the property would be disclosed here etc. . .  Normally this Seller’s Disclosure can act as a road map for you and your inspector with regard to issues with the house, but, this is not the case with a bank-owned property.  Seller is a bank that knows absolutely nothing about the condition of the property and is under no obligation to disclose any information about the property.  The lender’s contract will make this painfully clear.

The Lender Contract:  As a buyer you must be very careful when you review the lender’s contract, IT IS NOT THE SAME ANIMAL AS YOUR LOCAL REALTOR CONTRACT!!!  Most lenders have a multi-state, boiler plate (lots of fine print) contract that they use in every state regardless of local custom. You may receive this contract as a stand-alone item or as an 8-15 page “addendum” that is “attached” to a local version of a real estate contract.  Do not be fooled when you see the lender contract attached as an addendum, the lender contract addendum will control – in other words, if the main contract says that you have ten days to inspect the property and the lender contract addendum says that you have five days, you have five days –

Limited Inspection Period / Limited Access: The message in all Lender Contracts is clear:  You are buying the property in “as is” condition. So, I recommend that you bring a fleet of inspectors with you on inspections and leave no stone unturned.  Go to the City or Town where your prospective purchase is located and see if there are any records of repairs, building permits, septic tank or underground oil tank installations or removals, etc, read and copy these reports; bring them and your questions to the inspection.

If the lender has completed any inspections or has any reports, they will be referenced in or physically attached to the Lender Contract (you should make sure that you receive all of these reports and provide copies to your home inspector) 

You must insist that the Lender turn on all utilities and de-winterize the property for the day of your inspections.  If the utilities are not turned on you will have a severely limited inspection of the property. Basically you will not be able to inspect any of the systems of the house (plumbing, electric, heating and air) and any area that is not well lit may be excluded in the contract that you have with the inspector.  If the lender will not pay to turn these utilities on then you must pay to have them turned one.  There may be a catch here in that the City or Town may be unwilling to turn these items on until the current bills are paid – it is likely that these utilities have not been paid along wit the mortgage which is how this property became bank-owned in the first place.  You must remember that this is a cost of buying a property for less than market value. If you fail to invest in the inspections you may ultimately find that the home was a bad investment when systems fail after you buy.

Septic and Smoke Certifications:  Watch out for septic and smoke detector/carbon monoxide detector certifications.  These two items: passing septic report and passing smoke detector certifications are traditionally the Seller’s responsibility.  Sometimes the Seller will not agree to provide these certifications, which cost $500+ total.  Read carefully and try to shift these inspection issues back to the Seller if at all possible.  If it is not possible, be prepared to pay for the inspection now, as opposed to after the inspection deadline where your lender will require that you have these items and if they did not pass, you may have to install or repair the septic system yourself in order to close an / or install smoke and carbon monoxide detectors throughout the house.  This could be very costly if these issues sneak up on you right before closing.

Finally, beware of the inspection deadlines and procedures. The time for inspections may be limited to just a few days. The process for requesting repairs may have restrictions.