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What to Consider Before You Buy a Foreclosed Home
A foreclosed home may be a great way to get a sweet deal on a house—but buyer beware!
With almost a third of the home sales in this country consisting of properties in some stage of foreclosure last quarter, purchasing a foreclosed home is a great way to pick up a terrific deal on a house. But foreclosed homes that have been abandoned or neglected for months—or even years—often come with hidden costs that can turn that bargain into a money pit. Here, a group of experts offer their top tips on steps to take if you’re in the market for a foreclosed home.
1. Invest in a home inspection. “For about $300-$400 dollars, a home inspector can provide a complete report on the structure, mechanical and major components of the home and property,” says Greg Herb, a licensed realtor and owner of Herb Real Estate in Boyertown, Pennsylvania. Charles Gifford, a licensed home inspector and owner of Amerispec in Jacksonville, Florida, agrees, adding that a home inspection by a properly credentialed home inspector will give you “a better picture of what you are buying and provide you with the framework to prioritize your repairs—or to walk away if it’s too much to handle.”
2. Seek out information on the house’s history. Many states require sellers of real property to complete a Seller’s Property Disclosure Statement (SPDS) as a part of any transaction. “The SPDS typically reveals any known material defects related to the property and provides the buyer with a historical perspective of the home, its maintenance, as well as any repairs or additions performed under the previous ownership,” says Herb. Often, however, these statements have certain exclusions, such as when a home is transferred between a husband and wife or between siblings. Another common exclusion is when a third-party seller, such as a bank or lending institution, owns the property as a result of a foreclosure. “When you purchase a foreclosure property from a bank that’s never been in the home, you lose the historical perspective as a buyer,” says Herb, who adds that a home inspection can help you learn about changes that may have occurred over the life of the property.
3. De-winterize the home. According to Gifford, who is also a member of the American Society of Home Inspectors (ASHI), if you plan to purchase a home that’s been unoccupied for several months, “the first thing you should ask is, ‘Are the utilities turned on?’” In foreclosed homes in many parts of the country, “the water is off, traps are filled with environmentally friendly anti-freeze, and water lines may be pressurized with air or blown out and fully drained,” to keep pipes from freezing and breaking, explains Gifford. Prior to a home inspection, the lines will need to be pressure-checked and energized. And, according to Gifford, you may need a licensed electrician to conduct a safety check on the property’s electricity before power is restored. “Each municipality has its own rules,” he says, “and out-of-town buyers may be required to pay a fee to turn on power and things can get complicated if there are three or four utilities to call before you can get everything operating. A good real estate agent should be able to provide you with referrals.”
4. Check for plumbing problems. The most catastrophic problems in abandoned or foreclosed homes are often caused by broken plumbing pipes or leaks. “Sometimes when you dig beneath the surface of a leaky toilet bowl that’s been shoddily repaired you’ll find that you not only have to replace the lead bend, but also whole floors, floor joists, and drywall that’s rotted or contains mold,” says Matthew Barnett, a licensed home inspector and owner of Brooklyn, New York-based Accurate Building Inspectors. An ASHI member, Barnett says controlling a mold problem can cost anywhere from a couple of hundred dollars to $20,000-$30,000 or more to repair and replace whole floors and walls made of plaster or drywall.
5. Investigate mechanical, water-heating, and electrical systems. “In abandoned houses with forced-air systems, dirt and debris and even small animals accumulate in the duct work,” says Barnett, “and if humidity has been around boilers or furnaces for long periods of time, the heat exchangers can corrode and you’ll need to replace them altogether.” This can cost between $3,000-$5,000, he says, depending on the type of system you’ll need. “Some utilities won’t light the pilot light of gas systems if the filters are dirty for fire safety,” adds Andrea Johnson, a Portland, Oregon-based licensed real estate broker and founding member and partner of U.S. REO Partners. This means you’ll need to assume the cleaning expense to test whether they’re operable.
6. Look for signs of deferred maintenance. “When owners simply give up and stop taking care of their home, there will be lots of maintenance issues, like the need to clean the gutters, clear debris off the roof, cut back overgrown vegetation, and caulk/seal tile in showers and tubs,” says Gifford, who adds that in certain distressed areas it isn’t uncommon to find that appliances, condensing units, and ceiling fixtures have been removed altogether. According to Barnett, “cheap repairs, like using duct tape or plumber’s putty over a leaking pipe or unprofessional wiring of a fan” can also lead to deeper problems, like mold or fire hazards, which may require costly fixes down the line.
7. Check for foundation cracks, roof, leaks and other exterior damage. “We tend to see it all—bad roofs, structural issues, water damage, and other big-ticket repair items,” says Gifford. “In arid climates, like Texas, the foundations of houses need to be watered or they can crack and ruin the house,” adds Johnson. For a home with a pool, Barnett recommends contacting a pool service to be sure the underground piping and equipment isn’t cracked or clogged. “A normal house inspection will cover the general condition of the pumping and filtering, the patio area, coping stones, and skimmers, but a pool service can try to get the system up and running to see if there’s any significant equipment damage,” he says. If there’s a problem, the owner may give you credit to get it running properly again.
8. Conduct a sewer scope. Especially for homes more than 20 years old, Johnson suggests investing in a sewer inspection. “Lines can be broken by tree roots,” she says, “or they may not be properly connected to public systems.” The lines may also be rotted, clogged, or damaged. A plumbing company can snake a video camera through the line to determine its condition.
9. Resolve any liens. “Many municipalities have regulations regarding the maintenance of properties,” says Herb. “If a bank owns a property, it will generally keep a lawn cutting schedule, but if it fails to do so, the municipality can place a lien on the property if it has to come in and maintain the lawn itself,” he says. “Any number of other liens may have been placed on the property by unpaid contractors, utilities, homeowners associations, and the like,” says Johnson. Prior to closing on a property, you’ll need to make sure all liens are thoroughly investigated by you and a title officer and remedied before title can be conveyed from the previous owner to you.
10. Re-key all the locks. “A lot of houses are on a master key system,” says Johson. “That means countless brokers, contractors, appraisers, and other people could have that key.” If you purchase a foreclosed home, she advises protecting yourself and your property by immediately installing new locks with new keys throughout before you move in.
About the author: Jean Nayar is a licensed real estate agent with Bond New York and the author of several books on decorating and design, including The Happy Home Project (Filipacchi Publishing), which was released this June.