The Tycoon Report

Beware These 5 Caveats When Buying a Foreclosure

Friday, November 6, 2009 | Ethan Roberts

Thanks to the tax credit for first-time homebuyers along with low interest rates, home sales have been creeping up during the past few months. 

However, a very large percentage of home sales are either foreclosures or short sales. 

First-time buyers and investors alike are looking for a deal -- whether as a safeguard against further market decline, as a way to lower their monthly payment, or as a vehicle to increase potential profits.

In my area of Northeast Florida, pending home sales are up more than 60% from this time last year and closed sales are up nearly 13% during the same time frame. A large number of these closed sales were either foreclosures or short sales. 

The atmosphere among the local real estate companies has now become carnival-like at times.  If you listen closely, you can almost hear some of the brokers making noises like carnival barkers:


BUT NOT SO FAST!

If you are not careful, you might get a home at a great price, but you can also inherit some big problems.  So that you don't find yourself investing in a money pit, I'd like to talk to you about some of the most-common problems you might encounter today.

1. You Get What They Don't Pay for

First, what you must realize about foreclosures is that they are often neglected by their former owners.  The routine-maintenance projects that people do to keep up their homes are usually not done, because the owner cannot afford to do them. 

I am referring to things like having the heating and air conditioning systems cleaned and maintained, or installing gutters to prevent wood rot (which can lead to termite infestations), or fixing a small roof leak before it does damage to the sheathing and ceiling below it.

A small task like keeping a shower properly caulked and grouted can prevent water from seeping behind the shower walls and rotting the wall board, which then becomes a much-more-expensive repair.  Caulk and grout cost about two bucks each, but often the previous owner won't spend even that little money. 

The last time I bought a foreclosure, this was the case, and sheet rock, tile, insulation and even one panel of exterior siding had to be replaced. And it could very well have been avoidable with a less-than-$5 expenditure by the prior owner!




Homeowners who are in financial trouble rarely do even the little things necessary.



So you have to be aware that, even if you have all of the necessary inspections done before you sign on the dotted line, you could still find other minor problems after you close on the home.

2. Beware of a Real 'Steal'

Second, with some foreclosures there is a problem with theft or vandalism.  It is bad enough when the thefts occur prior to your bidding on the property.  At least then you know what is missing and can bid accordingly.  However, sometimes the thefts or vandalism occur after you have already gone to contract. 

Many people may have access to the foreclosure lockboxes or keys.  So, make sure that you do a total property walk-through 24 to 48 hours prior to closing.  If there is expensive damage or items stolen, you may need to renegotiate the deal with the bank.  Check your contract to see what it says about such a possibility.

3. Know Your Boundaries

Third, although the banks will not usually pay for a survey, make sure that you have one done.  Most mortgage companies will demand that a survey be performed, but it is recommended even on cash deals. 

One time I bought a foreclosure and they told me at closing that my fence was about six inches over the survey line.  Not a huge problem to remedy.  However, the first day that I arrived at the house to begin rehabbing it, I was greeted by a half-crazed, angry neighbor who screamed at me that my fence was three feet onto her property and that her lawyer would be suing me if I didn't move it immediately!

It was something I would have fixed soon enough anyway, but I wasn't prepared to do so the very first day of ownership.  It was also very unpleasant to have a crazy woman screaming at me about a house that I had just purchased.  I didn't put the fence on her lot! 

Fortunately, I had a survey done prior to closing, and was able to see exactly where the proper boundary and fence should be placed.

Another time I bought a foreclosure that had an actual survey problem, and we could not close on the home until we received a written waiver notice from the county.  The closing was delayed by two months, and caused everyone much inconvenience.

4. Know Whether the Deed is Really Done

Fourth, understand that sometimes with foreclosures, there are title problems that can delay or even prevent the closing from taking place. 

I lost a deal last year because the foreclosure papers had been drawn up incorrectly, with the wrong type of deed described, by the foreclosure attorney.   The property had to be re-foreclosed, and then be re-listed onto the market -- a process that would take several months.  This cost me some time and money as well. 

I learned an important lesson, and that is to never spend any money, prior to closing, on non-returnable materials for any property.

Also be sure that you are getting owners' title insurance, and lenders' title insurance as well if you are taking out a loan.  One time, I was the selling agent on a foreclosure.  After the closing, it was discovered that there was a $25,000 lien on the house that was missed by the title company that closed the escrow. 

The title company had to make good on paying off this lien.  If the new owner had not had title insurance, he would have found himself in an expensive hole.

5. Don't Spend a Dime Till You Can Say 'The Title is Mine'

Fifth, if the foreclosure you are buying is sold at public auction, in some states you cannot receive the certificate of title for 10 days.  During that time, the previous owner has the right to pay off his mortgage debt in full and reclaim his home. 

So, you had better wait until you have the certificate in hand before starting any work on the house.  Otherwise, you might just wind up remodeling another person's home for free!





So, these are the five caveats that I wish to leave you with today.  At any rate, I do want to emphasize that buying a foreclosure (or sometimes a short sale if it's cheap enough), can be a great way to find a home that might otherwise not be affordable, or that may provide you with a great deal of instant equity. 

But just be careful, do all your due diligence, have all the inspections done, etc.  You may just save yourself a whole lot of time, inconvenience and money!

See you next week!





Ethan Roberts
Contributing Editor
The Tycoon Report