Buying a house that is in foreclosure is often touted as a way for both owner-occupants and investors to get a great deal on a property. However, the potential financial rewards are not arrived at without a significant amount of hard work.

Foreclosed properties have some common problems. In addition, there are some standard difficulties you may encounter in purchasing one. While foreclosures can be great investments as fixer-uppers, either to live in or resell, they often come with baggage.

Key Takeaways

  • However, the potential financial rewards of buying a foreclosed property are not arrived at without a significant amount of hard work.
  • Many homes in foreclosure have been poorly maintained and may have structural issues, or water or mold damage; some may be in violation of codes or other standards.
  • Vandalism can also be an issue, with thieves or the prior owners sometimes taking fixtures, appliances, windows, or anything else of value.
  • There may be problems with lenders who don't want to fund the purchase of foreclosed homes; purchasing with all cash may be a buyer's only option.
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The Pitfalls Of Buying A Foreclosed House

Problems With the Property

The most important thing to keep in mind before deciding to shop in the foreclosure market is that these properties are given up by owners who can't afford their mortgage payments anymore. In these cases, the house has often been poorly maintained—after all, if the owner can't make the payments, they are likely falling behind on paying for regular upkeep as well.

Also, some people who are forced into foreclosure are embittered by their situation and take out their frustrations on their home before the bank repossesses. This often involves removing appliances and fixtures, and sometimes even outright vandalism. After the occupants leave, foreclosures sit abandoned, often inviting criminal activity.

Maintenance and Condition

Maintenance and condition can be a problem in foreclosed properties because of the circumstances under which the previous owner moved out and the amount of time the house may have been unoccupied. Some of the main concerns include the following.

Lack of Cleanliness

Bank-owned properties are sometimes disgustingly dirty because of time spent sitting empty, intentional neglect by the previous owner, or occupancy by vagrants. When a home is locked up with no air circulating for months, built-up dirt can cause the entire home to smell.

Bad Renovations

The previous owner may have made changes to the home without obtaining the proper permits. A common example is converting the garage into a living space so more people can live in the home. These changes may be undesirable to new owners or create headaches for them with city government officials.

If the previous owner started to improve the home but then fell on hard times, there may be partially finished work in the house. The bathrooms may be redone while the kitchen has not been updated in 40 years, or there may be new floors in the living room while the bedrooms still sport ancient carpeting.

Additionally, if any repairs were made, they may have been done by the owners themselves or by unlicensed professionals—in other words, people who may not necessarily have done the work correctly.

Mortgage lending discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau or with the U.S. Department of Housing and Urban Development (HUD).

No Electricity

With no one living in the home, the electricity may be off unless the bank has intentionally kept it on. With no light, it can be hard to see what you are buying in some rooms, particularly basements and windowless bathrooms.

Water Damage

A small leak under the kitchen sink can lead to a mold problem, and a roof leak or burst pipe can lead to major water damage. With no one around to take care of issues as they occur, small problems can quickly turn into big problems, and big problems can turn into disasters.

Lack of Basic Maintenance

If the previous owner couldn't afford the mortgage payments, you can bet he also could not afford to repair leaks, termite damage, a broken garbage disposal, or anything else.

Dead or Overgrown Grounds

Depending on the climate where the home is located, the lawn and landscaping may be totally dead or extremely overgrown. Banks usually do not 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 do not take everything with them. Many real estate-owned (REO) properties contain furniture, trash, clothes, and other items that you will be responsible for disposing of when you become the property owner.

Vandalism and Neglect

Damage is not uncommon in foreclosure properties, and it may be caused by vandals or the former owner.

Random Vandalism

Sometimes when a property sits vacant, especially if it is in a moderate-to-high crime area, new owners will have to contend with graffiti, broken windows, and other damage.

Owner Vandalism

Broken windows can be common in REOs for several reasons. As mentioned previously, vandalism could be a cause. Also, when banks lock out owners while taking possession of the property, the former owner may break a window or door to retrieve belongings. Previous owners may also purposely inflict damage at the bank's expense by putting holes in walls or tearing off baseboards and crown molding.

Removal of Valuable Items

To inflict revenge against the bank and to make an extra buck, the previous homeowner might remove items of value, including appliances, fixtures, doors, copper pipes, and more. Anything the homeowner does not take might be taken by thieves. Either way, many bank-owned properties are missing things that generally come with seller-owned properties.

Problems With the Purchase

Despite all of these potential problems, foreclosures can still be a good deal. If you are willing to fix problems that most people don't want to deal with, you can purchase a home at a significant discount. However, you may encounter additional issues when it comes to actually purchasing the property and improving it to move-in condition.

Issues With Lenders

Buying a home from a lender has its issues as a result of the increased level of bureaucracy and the limited transparency afforded to those who buy foreclosures.

Financing

Lenders will not give a homebuyer money for a dwelling they consider uninhabitable or that appraises below the purchase price. If you are an investor paying cash, of course, this will not be a problem. The HUD Section 203(k) program can also help in some circumstances.

Time Delays With the Owner Bank

Common sense says that banks should want to unload REOs as quickly as possible, but in reality, banks sometimes drag their heels in considering offers and throughout the escrow process.

No Seller Disclosures

Since no one from the bank has ever lived in the house, they are unlikely to have any knowledge of existing problems with the property. You will have to uncover everything yourself, either during the home inspection, by asking neighbors, or through experience after you become the homeowner.

Competition

Because foreclosures can be great deals, they are attractive to investors looking to flip properties or use them as rentals. Since investors can make all-cash offers with fewer or no contingencies and fast closings, their offers may be more attractive to the bank than those from would-be owner-occupants.

The Bottom Line

There is money to be made in foreclosures, but you should know the challenge you are undertaking ahead of time and choose your property carefully. Don't overlook the fundamentals that make a property desirable just because the purchase price is a bargain. You should also extensively research financing options for foreclosed homes.

While you can go the traditional route of using a private lender as you would for a conventional home, lenders can sometimes be reluctant to finance a foreclosed home, so it is worth looking into loans from the Federal Housing Administration (FHA) or Freddie Mac.