Foreclosed properties, also called REOs or bank owned properties, can be a great investment, but buyers need to proceed with caution. Many banks require a buyer to sign the bank's one sided contracts and will not accept the MLS contracts real estate agents are familiar with and use every day. Bank contracts are written by attorneys using legal terms and clauses that are beyond the knowledge of a real estate agent or a lay person. As a buyer, you do not want to sign a bank contract with a real estate agent that does not have the legal training to interpret and analyze complicated contracts and who is not permitted by law to modify, change language, or provide advice regarding the meaning or language of a contract.
Signing a bank contract when purchasing a bank owned property with a real estate agent and not a lawyer would be like having surgery without a doctor.
One bank's contract stated it would have the "discretion" to decide whether or not it would keep the buyer's earnest money if the buyer decided they did not want to purchase the home after the inspection. This is equivalent to putting up $10,000 in earnest money without having an inspection contingency. The language in the contracts can be subtle, so even when it appears there is an inspection contingency, for practical purposes the wording for the "inspection contingency" may prevent a buyer from getting their earnest money back.
Another bank had a clause regarding the condition of title where the bank's contract allowed it to keep the buyer's earnest money based on the bank's "determination" of whether the condition of title was a material problem or not. Contracts real estate agents use from the MLS, allow a buyer to terminate the contract and get their earnest money back if there are any issues with title. It is up to the buyer in this situation, not the bank as to whether they want to change their mind and get their earnest money back. Buyers do not have these protections with bank contracts.