BANK FORECLOSURE DEALS? THINK AGAIN!

Your best value in a home today could very well be purchasing a well-priced home with the current owners still in possession. While the trend for bargain hunting buyers seems to be finding that abandoned bank foreclosure and fixing it up, I have seen this strategy turn into a nightmare for some buyers.

Here are a few items to think about:

1.    Compliance/legal issues – out of state sellers (banks) are sometimes not aware of Michigan laws & requirements resulting in lengthy delays and there are usually no seller disclosures or records available.

2.    Long delays in negotiation – your “accepted” offer may go into a pool of other “accepted” offers with the seller ultimately deciding weeks later to take another bid or reject all of them. Unfortunately, much of this negotiation turns out to be verbal – (non-enforceable) – creating lots of frustration and hard feelings.

3.    Not enough help – to overwhelmed and overburdened bank employees working on your transaction, it is just one of thousands they must process. Plan on at least 2 to 3 times longer processing time – be prepared for “lost” documents, additional forms needed and unreasonable requests.

4.    The AS-IS clause – the bank’s purchase agreement is very different from what you may be used to. Unlike buying a “regular” house where the seller is responsible for keeping the property in substantially the same condition until the closing, the foreclosure sale puts all the risk on the buyer. Once you have a confirmed agreement of sale with the bank, if anything happens to the property prior to closing it is your problem. I know of properties in which copper pipes, aluminum siding, A/C unit, kitchen cupboards, hot water tanks and furnaces have been removed and the buyer ended up with a shell. Believe me, it happens.

5.    The Equity Loan – the strategy of using your equity line of credit to fix up the house can be derailed when your bank decides to “freeze” or discontinue your line of credit. You have a house in major disrepair and no money to make the necessary improvements.

6.    Water Intrusion & Mold – some houses have remained vacant for a year or two with no heat/electricity, flooded basements, leaky roofs, missing downspouts & gutters cause water damage and eventual mold. Temperature extremes also cause stress cracks and structural damage; animals & squatters like to seek shelter as well.

7.    Your Ability to Get Approved – don’t get too caught up in your “investment strategy” until you have a firm mortgage approval from your lender stating that they will lend you money on this “distressed” property. Don’t think you’re going in zero down on these deals.

8.    Underestimating – unless you are a savvy builder/tradesman, the average buyer has no idea of the real cost of renovating these distressed homes. There are lots of hidden costs and problems that arise which have devastated some buyers. Here’s a rule of thumb à plan on the project taking twice as long and costing twice as much as your best estimate.

My best advice is to gather enough information to see if you are ready for this type of a challenge. It can be mentally, physically, and psychologically draining, but, if you’re up for it, rehabbing the distressed home can be very rewarding.