With hundreds of thousands of homes in foreclosure or on short-sale lists, there’s never been a better time to score a sweet deal. But discount-priced foreclosures and short sales can come with a raft of expensive problems.
Just ask Adam Melson of Philadelphia. Melson looked at more than two-dozen houses and jumped at the chance to buy a short-sale home that seemed like a decent buy in a good neighborhood.
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But $40,000 in renovations later, he feels differently.
Melson’s home inspector said the short-sale house was fine — just a little termite damage in the basement. But when Melson tore up the linoleum to repair a soft spot in the kitchen floor, he found the damage went layers deep.
“The boards supporting the kitchen floor were entirely eaten by termites,” he says. “I also learned at this time that the kitchen sink did not drain anywhere. It drained openly under the house.”
There’s a flood of properties on the market with lots of motivated sellers, says Jim Randel, real-estate investor and author of “The Skinny on the Housing Crisis.” “The only people who are selling in a declining market are those who have to sell,” he says.
Although they have to sell, you don’t have to buy. Know what you’re getting into before you buy a short-sale or foreclosure property and be mindful of these common mistakes:
First, foreclosure-property owners didn’t want to leave.
“They’ll often take that frustration out on the property,” says J. Scott Steinhorn, a real-estate investor with Lish Properties LLC in Cobb County, Ga., with experience in foreclosures and short sales.
“I’ve seen a couple foreclosure properties where the previous owners clearly took a sledgehammer to the nice hardwood floors, the tiled showers and the cabinets just to be spiteful,” he says.
Empty foreclosure properties may suffer from issues that arise from neglect — leaks, mold, termites, thieves, squatters and filth — because the property sat vacant for weeks, months or years before purchase.
Yet in many states, banks are typically exempt from providing the disclosure statement typically required of a traditional seller. The statement outlines the condition of the property. “The buyer of a foreclosure is essentially starting from scratch when it comes to determining the property issues,” Steinhorn says.
For example, a bank won’t reveal whether the house is constructed from defective materials — materials later resulting in class-action lawsuits, Steinhorn says.
Short sellers will fill out the disclosure form. But while short sellers are motivated to sell and repair their credit, they could have skimped on essential maintenance of the roof, furnace, air conditioner and hot-water heater.
“If a house is between 15 to 30 years old, there’s a very good chance it needs some expensive maintenance,” Steinhorn says.
Be sure to clear your calendar and make time to tag along on your home inspection. “Most of what we do is education,” says Kathleen Kuhn, president of New Jersey-based HouseMaster, one of the largest home-inspection franchisers in North America.
Melson wishes he’d been more aggressive in asking questions during his inspection. “This is the time where the house is open for all criticism and inquiries,” he says.
Ask for repair estimates when an inspector notes a problem, or do some research online later that night. “Every homeowner underestimates how much renovation costs,” Kuhn says.
Some buyers are even doing an inspection before making an offer, particularly in areas such as Florida and California where foreclosures and short sales are numerous. While most inspections are done after the initial offer, with the sale contingent upon mutual agreement of remedies, a pre-offer inspection allows house shoppers to walk away and find a better buy.
If you get to see a disclosure statement, it would indicate if a house was in a flood plain or had any unpermitted renovation, Steinhorn says. Because bank-owned properties often sell as is without disclosure, buyers need to do a little extra research on the home’s status.
If the property is in a flood zone, you may pay thousands yearly in additional insurance costs, and you may find it difficult to resell the property. You can read more about flood prevention and insurance at FloodSmart.gov.
Ensure that all renovations have been permitted and approved. “If not, and there is a problem, the city can cite you,” says Brendon DeSimone, a San Francisco-based real-estate agent.
Don’t assume you’re getting a great deal in today’s real-estate marketplace, Randel says. “Think of yourself as an investor,” he says. Consider the house’s condition, inspection, price and value dispassionately.
