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Posted at 05:30 AM ET, 02/13/2013

That foreclosure might not be such a good deal

That foreclosure you’re thinking about buying just might not be the deal you thought.  

There are some additional problems and hurdles associated with buying a foreclosure that buyers should make sure they price into their offers.  Homes that sit vacant can deteriorate much more quickly and the problems may not be noticeable at first and banks can make for very difficult sellers.

I buy many foreclosures every year and clearly good deals can be had.  The key is to know the factors and to properly price them into your offer or max price.

You may not think about it but people do a lot to help maintain a home.  They keep the inside of the home a nice consistent temperature.  They usually clean and they usually do at least minimum maintenance.

In the Washington area, the humidity level is sufficiently high to make surface mold.  When your air conditioner is running, the intake sucks in the air and cools it down below the dew point.  Moisture then condenses to water and drains out of that white plastic pipe you see hooked to your furnace.  This drastically reduces the humidity level in your home. 

When a home is foreclosed, normally the people move out.  They turn off the electricity, water and gas. They secure the home and close and lock all the windows and doors. The insides of these homes can become like jungles in the summer. 

Keep in mind that the average time it takes to foreclose on a home in Maryland is 541 days and 115 days in Virginia, according to Market Watch. That’s just the time it takes for a bank to get control of the home.  It then takes time for the bank to process the home and list it for sale.  It is not unusual for a home to sit vacant for four years in Maryland.  This is a lot of time for a home to be neglected.  

Those closed-up homes not only get hot in the summer but they get cold in the winter.  Those extreme temperature swings can be very bad on drywall. You may notice the cracks in the drywall and the popped drywall nails. You may not.

Also vacant homes are huge targets for thieves and vandals.  They drive neighborhoods looking for vacant homes.  Take a good look at all of your water lines and anything that is made of copper.  They like to pull these out and believe it or not it can be missed.  They also like to take air conditioning units and the heating coil out of the furnace.

Also many problems can develop with plumbing from a lack of use.  The regular flow of water actually helps to keep your pipes clear of debris and corrosives. 

A thorough home inspection is extremely important when buying a foreclosed home.  But even an inspection won’t spot surface mold inside a wall or many plumbing problems.

The next biggest challenge with a foreclosure is dealing with a bank or an institution as a seller.  They can be very difficult and very unpredictable.  To make matters worse, they make you sign addendums to the contract that stacks the deal very much in their favor. 

Normally the bank adds provisions that remove almost all of a buyer’s ability to enforce the contract.  Most contracts outright say that the bank can pull the deal at any time for any reason before the actual sale. 

I’ve actually seen this happen.  The bank got a better deal and it simply canceled the contract and sold it to the other party.  All of the original buyer’s time and expense was wasted and there was no recourse.

However, the contract will strictly hold the buyer to the agreed upon closing date.  The banks can and often do fail to close on time.  In my experience, banks seem to have very little concern for the closing dates or the buyer’s schedule.  But if the buyers  are unable to close on time for any reason, banks usually hit them with fees of $100 or $200 per day until closing occurs or they’ll just cancel the contract.

I had a deal in which the bank took five weeks to get me an actual ratified contract and then it demanded I close on the contract closing date just a week away.  This home had a septic tank and I told bank officials that a week was not enough time to inspect the tank.  I told them that I needed another week or I wanted $10,000 off of the price. They just canceled the contract.

And, of course, almost all foreclosures are as is.  The bank will make no repairs.  Bank officials won’t even turn on the utilities for you.

Another problem I’ve noticed with foreclosures is that no one can tell you about the property.  I bought a home in Capitol Heights last year.   The tax records and the MLS listing said the home was on public sewer. 

Just a couple weeks after I sold it, the buyer contacted me and said the basement bath was backing up.  It turned out the home was on a septic system and the system had collapsed.  We had no idea it was on septic or we would have inspected the tank, certainly one that old. 

I’ve now had several problems with buyers developing major plumbing problems after I sold them the home.  We’ve had enough problems that now I provide a seller warranty whether the buyer asks for it or not.  My contractors will cover problems with their work and the appliances come with warranties so I pretty much get a whole third party home warranty just to cover plumbing problems.

When buying a foreclosure just know that the contract will heavily favor the bank.  Make sure you do a thorough home inspection even if it’s just informational.  I’m not a huge fan of home warranties but in the case of a foreclosure they might really be worth having.  And, most important, make sure you price in this additional risk, work and aggravation into your offer.

 

Read more about Pierce’s experiences as a real estate investor

Justin Pierce is a real estate investor in Northern Virginia.

 

By Justin Pierce  |  05:30 AM ET, 02/13/2013

Tags:  investor

 
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