You can turn a closed house around
Buying a Foreclosed House: Top 5 Pitfalls
Buying a home that is in foreclosure is often touted as a way for both owner-occupiers and investors to get big on property. However, the potential financial rewards are not achieved without a lot of hard work.
Excluded properties have some common problems. Additionally, there are some standard purchasing difficulties. Foreclosures can be a big investment as a fixer upper, either for residential or resale, but they often come with luggage.
The central theses
- However, the potential financial benefits of buying a foreclosed property are not achieved without a significant amount of hard work.
- Many foreclosure homes have been poorly maintained and may have structural problems or water or mold damage. Some may violate codes or other standards.
- Vandalism can also be an issue, with thieves or previous owners sometimes taking away fixtures, appliances, windows, or other valuable items.
- There may be problems with lenders unwilling to finance foreclosed home purchases. Buying with cash may be the buyer's only option.
Problems with the property
The most important thing to consider before heading into the foreclosure market is that these properties are being abandoned by owners who can no longer afford their mortgage payments. In these cases, the home has often been poorly maintained - if the owner can't make the payments, they are likely to fall behind in making maintenance payments too.
Some people who are being forced into foreclosure are bitter from their situation and take their frustrations in their home before the bank repossesses them. This often involves the removal of equipment and fixtures, and sometimes even complete vandalism. After inmates leave, foreclosures sit abandoned and often invite criminal activity.
Maintenance and condition
Maintenance and condition can be an issue with foreclosed properties due to the circumstances the previous owner moved out and the length of time the home may have been unoccupied. Some of the main problems are as follows.
Lack of cleanliness
Bank properties are sometimes disgustingly dirty because they sit empty, are deliberately neglected by the previous owner, or are inhabited by vagabonds. If a house is locked for months with no air circulation, accumulated dirt can cause the entire house to smell.
The previous owner may have made changes to the home without obtaining appropriate permits. A common example is converting the garage into living space so that more people can live in the apartment. These changes may be undesirable for new owners or cause a headache for government officials.
If the previous owner started improving the house but then got into tough times, the work on the house may have been partially completed. The bathrooms may be renewed while the kitchen hasn't been updated in 40 years, or there may be new floors in the living room while the bedrooms are still covered with old carpets.
If repairs have been made, it may have been done by the owners themselves or by unlicensed professionals - in other words, people who may not have done the job properly.
Discrimination on the basis of mortgage credit is illegal. Consumer Financial Protection Bureau or the US Department of Housing and Urban Development (HUD).
If no one lives at home, the power can be off unless the bank intentionally turned it on. Without lights, it can be difficult to see what you are buying in some rooms, especially basements and windowless bathrooms.
A small leak under the sink can create a mold problem, and a roof leak or burst pipe can cause major water damage. With no one around to deal with problems that arise, small problems can quickly become big problems, and big problems can become disasters.
Lack of basic maintenance
If the previous owner couldn't afford the mortgage payments, you can bet they couldn't afford to fix leaks, termite damage, a broken garbage disposal, or anything else either.
Dead or overgrown soils
Depending on the climate the house is in, the lawn and landscape can be completely dead or extremely overgrown. Banks don't typically pay for gardeners to maintain the yard of a foreclosed home.
Personal property left behind
Sometimes foreclosed homeowners are locked out of the property before they can move their belongings, and in some cases they don't take everything with them. Many real estate owned by real estate (REO) contain furniture, trash, clothing, and other items that you are responsible for disposing of when you become the owner of the property.
Vandalism and neglect
Damage is not uncommon with foreclosure properties and can be caused by vandals or the previous owner.
Sometimes when a property is vacant, especially if it's in a medium to high crime area, new owners struggle with graffiti, broken windows, and other damage.
Windows in REOs can often break for a number of reasons. As mentioned earlier, vandalism can be a cause. If banks lock owners out while they take possession of the property, the previous owner can break a window or door to recover items. Previous owners can also deliberately inflict damage at the bank's expense by drilling holes in walls or tearing off baseboards and moldings.
Removal of valuables
To get revenge on the bank and earn some extra cash, the previous homeowner can remove valuables such as appliances, fixtures, doors, copper pipes, and more. Anything the homeowner doesn't take could be taken by thieves. In either case, much of the bank-owned properties are missing things that are generally associated with seller-owned properties.
Problems with the purchase
Despite all of these potential problems, foreclosures can still be good business. When you're ready to fix issues that most people don't want to deal with, you can buy a home at a significant discount. However, additional problems can arise when it comes to actually buying the property and moving it into the move-in state.
Problems with lenders
Buying a home from a lender has its problems due to increased paperwork and limited visibility for those buying foreclosures.
Lenders will not give a homebuyer any money on an apartment it is deemed uninhabitable or that is valued below the purchase price. Obviously, if you are an investor who pays cash this is not a problem. The HUD Section 203 (k) program can also be helpful in certain circumstances.
Time delays at the owner's bank
Common sense says banks should want to unload REOs asap, but the reality is that banks sometimes pull their heels when considering offers and throughout the escrow process.
No information about the seller
Since no one from the bank has ever lived in the house, it is unlikely that they would be aware of any existing problems with the property. You have to discover everything yourself, either during the home inspection by asking neighbors or through experience after you become a homeowner.
Because foreclosures can be cheap offers, they are attractive to investors who want to turn over properties or use them as rental properties. Because investors can make cash offers with little or no contingent liabilities and quick closings, their offers may be more attractive to the bank than those of potential owner-occupiers.
The bottom line
Foreclosures can be made money, but you should know beforehand the challenge you are facing and choose your property carefully. Don't overlook the basics that make a property desirable just because the purchase price is a bargain. You should also do extensive research into foreclosed home financing options.
While you can take the traditional route of using a private lender as you would with a traditional home, lenders can sometimes be reluctant to finance a foreclosed home. So it's worth checking out Federal Housing Administration (FHA) or Freddie Mac loans.
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