Should You Buy a Bank-Owned Home? Is It Ethical?

white and red wooden house miniature on brown table

Buying a house can be a daunting task even for people who have some experience with real estate transactions. It can be nerve-wracking for those who are buying a house for the first time. There are a lot of reasons behind this. 

Many people view buying a house as the culmination of a lifelong dream. Others may be willing to try out a popular side hustle. Whatever the case may be, all buyers in the market have to traverse the same landscape.

This is often when prospective buyers end up learning about bank-owned houses. Don’t confuse the term as banks being in the business of buying and selling houses to turn a project. bank-owned houses are also called foreclosures. 

What does it mean if a house is bank-owned?

A bank-owned house or a foreclosed house is one that was seized from the original borrower. The person who initially bought the home would have taken out a loan from the bank for the purchase. 

If at any point during their repayment term they’re unable to meet their debt obligations, the bank can legally seize possession of the property and dispose of it to get the bad debt off of their books.

This process is called foreclosure. It enables banks to recover the amount owed to them after the borrower fails to meet their obligations. Until the bank can sell the mortgaged property, the house remains bank-owned.

The actual foreclosure process differs from state to state. It generally starts when the borrower defaults or misses on a mortgage payment. The foreclosure proceedings don’t begin immediately. 

The bank would first send a missed payment notice to remind the borrower that they have outstanding dues to clear. If subsequent payments are also missed, the bank may send a demand letter as they then deem the case worthy of escalation. 

If the borrower is unable to make the payments, they may be served with a notice of default with a grace period to get caught up on their payments and reinstate the loan. If the borrower remains unable to pay, the bank will move in to foreclose the home.

How do you buy a bank-owned property?

Many buyers in the real estate market keep an eye out for bank-owned houses as these properties are often available at a discount. Banks don’t want to keep the homes on their books as their primary concern is to recoup however much of the original loan as they can.

It’s important to keep in mind that bank-owned homes are sold on an “as-is” basis. This means that the buyer will have to purchase the property in its current condition. Even if the house requires significant repairs or an inspection reveals issues, the bank will not be fixing them. These factors can be used to negotiate the price of the property, though.

The actual purchase procedure works much in the same way as a conventional sale. The buyer will make an offer and the bank’s asset manager will decide whether or not they want to accept it. If they do decide to accept it, chances are that closing on a bank-owned home is going to take a bit longer. 

That’s because the sellers in a conventional sale are moving to another place as well and they don’t want to pay two mortgages. The bank’s asset managers don’t have such compulsions and they already have a backlog of deals to close before they can get to yours.

How do I find a list of bank-owned properties?

There are quite a few resources available online to find bank-owned homes. A Multiple Listing Service will be your best bet. You can work with your buyer’s agent and ask them to search the MLS for foreclosed properties. Alternatively, you can also look into real estate agents in the market you’re considering that specialized in these deals.

Even popular online real estate services like Zillow provide users with the tools to search for foreclosures. There are other tools available for similar research but not all of them may be free.

Is it bad to buy a bank-owned home?

Any potential deal that may be up for grabs on a foreclosed property won’t be without its pitfalls. It’s not impossible to find a bank-owned home that’s in top condition but those are few and far between. The vast majority of listings will have at least one or more of these problems.

Poor maintenance is always a primary concern when considering a bank-owned home. The banks don’t spend money on the upkeep of these properties because they just want to get rid of them. 

They sell them on an “as-is” basis so the condition you may find the house in will depend on many factors. They include the conditions in which the previous owner moved out, how long the property has been lying vacant, whether it has been vandalized or has mold damage.

Another downside that most buyers don’t think about when looking at such properties is the difficulty that they may experience in obtaining financing for a foreclosed home. Some lenders just don’t approve loans for foreclosed homes. If those circumstances prohibit your deal, buying the property outright in cash may then be the only option.

It’s not bad to buy a bank-owned home but it does require a lot more diligence. Buyers that are willing to put in the work will be able to take advantage of these opportunities in the market. Diving into a deal without doing the diligence would simply be a mistake.

Environmental problems with bank-owned homes

Environment risks aren’t just limited to commercial or industrial properties. Even residential properties can pose an environmental hazard if they’re not properly maintained. That’s the case with the vast majority of bank-owned homes. 

For example, if a foreclosed property has a heating oil tank that leaks either due to disrepair or vandalism, the heating oil would soak into the soil and contaminate the groundwater underneath. That’s just one example. 

Other environmental liabilities with these properties may include lead-based paint, asbestos and mold damage, septic systems, etc. Sometimes, fixing these environmental problems may end up costing more than the discount that was available on the foreclosed property. 

So the buyer ends up losing money in the long run. The detrimental impact of these factors on the environment is an even bigger problem. 

Ethical banking practices many banks miss

It’s not uncommon for people to generally have a low opinion of conventional banks due to their ethical failures. Whether it’s because even when they get caught breaking the rules they’re let off without a mere slap on the wrist or that they just don’t seem to learn from their mistakes.

The 2008 financial crisis is a prime example of the banks not being ethical in their dealings. The crisis was triggered by sub-prime loans that were given to people who were unable to meet the credit standards for responsible lending. 

Such was the scale at which these loans were given out that when interest rates rose and those homeowners were unable to pay their mortgages, the resulting domino effect dealt a severe shock to the global economy.

This is only the tip of the iceberg when it comes to the ethical issues that many banks just seem to sweep under the carpet. There are already far too many examples of conventional banks using their influence to manipulate credit ratings and inaccurately selling securities without ever really being held accountable for their actions. 

Find banking solutions that don’t sell foreclosed homes

It can be tough to find banking solutions with conventional banks if you don’t want to compromise on these ethical concerns. You might also feel strongly about not capitalizing on the distress of a family that lost their home due to a change in financial circumstances in the hopes of securing a good deal. Your bank may simply not care.

Aspiration is not like the Wall Street banks. It doesn’t sell foreclosed homes. Aspiration is also wholly committed to Clean Money. Did you know that the four biggest banks in America loan out $240 billion of their customers’ money to fossil fuel projects annually? With Aspiration, you always have the peace of mind that your deposits won’t go to fund projects that are actively harming our planet.

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