Posted on: 24 October 2018

With the price of residential real estate continuing its rapid rise across the United States, many would-be homeowners are looking at short sales, foreclosures, or bank-owned properties to gain a foothold in the market without going over budget. However, the process of buying these properties—and the types of warranties you receive when purchasing a bank-owned property—can be very different than purchasing a home from an individual owner. Read on for three things you'll need to know before you put in an offer on a foreclosed or bank-owned (REO) property. 

You May Get a Special Warranty Deed

While a special warranty deed can sound more exciting or special than a plain warranty deed, it also comes with more legal risks. A traditional warranty deed promises the buyer that the property's title is free from defects, which ensures that the buyer knows exactly what they're getting for their purchase price. 

A special warranty deed warrants that the title for the property is clear for the time the seller owned the home—but it doesn't warrant against title defects that were incurred before the purchaser (often, the bank or a commercial real estate company) owned the home. This means that there may be old tax liens, unrecorded title transfers, and other issues that aren't readily discoverable without an extensive search through the county's records division.

Although you can purchase title insurance to protect against these defects, the amount of coverage typically provided by title insurance often isn't enough to protect an owner against major issues with property title. For example, if you find out that the seller didn't have legal title to the home at the time of the purchase, your title insurance may not fully cover your down payment or purchase price. It's often worthwhile to pay for your own title search pre-purchase to ensure you know exactly what you're getting. 

Getting a Mortgage Can Be Tough

Because of the potential for title defects for foreclosed and REO homes, it can be tough to get a mortgage. Lenders are understandably reluctant to extend credit to purchase a property for which the seller can't fully warrant title. In many cases, homeowners opt to pay cash for the property and then, once the clear title is in hand, refinance to a 15- or 30-year mortgage for a lower monthly payment. 

Contingencies Aren't Always an Option

Most foreclosures and REO properties are offered contingency-free. While private sellers may entertain purchase offers that include contingencies allowing buyers to back out if their current home doesn't sell quickly, if a home inspection reveals major problems, or a title search turns up defects, bank and REO sellers are more likely to take a "take it or leave it" approach. Offers tendered with contingencies, even offers for more than the purchase price, may be rejected.

Having an experienced real estate attorney in your corner can help you evaluate the merits of the homes you're browsing and determine which are worth the legal risk, especially when it comes to special warranty deeds.