The Red Flags of Foreclosure Investing | Part 1
Make sure you keep an eye out for these red flags when foreclosure investing.
Purchasing foreclosed properties is often great for house flippers. You can buy the house for well under market value, and in turn, get a great deal. Generally speaking, there are three types of foreclosures: Short sales, foreclosures bought from an auction, and REOs.
While these properties are generally much cheaper than houses bought in a traditional way, they also come with a great deal of risk.
The Red Flags of Foreclosure Investing | #1-5 – H1
If you are buying a property from an auction, you’ll almost never be able to see the interior of the house. This means that there is no real way to assess any problems.
However, if you are thinking about purchasing a short sale or an REO property, you will be allowed to look inside and get the home inspected. For these latter two cases, make sure you avoid purchasing a property with any of the following problems.
1. Disgruntled Previous Owners
In a traditional purchase, you will buy a property straight from the previous homeowner. That homeowner will usually try to make the house as appealing and problem free as possible before putting it on the market, so they will be able to sell it for the best price.
However, when buying a foreclosure, the previous owner does not want to give up their home. Rather, their lender forces them into it because they cannot pay their mortgage.
Sometimes, these bitter homeowners will destroy their own home before they are evicted and will leave you to clean up the mess.
Common damages include things like like excessive trash, holes in walls, and unwanted possessions. However, you might encounter a real life horror story like a home with toilets and sinks filled with cements, which would cost you thousands on all new piping.
A craftier previous homeowner might strip all of the assets of the home like fixtures and appliances. They might even steal any new cabinets or expensive countertops. If given the chance, some people will steal everything but the kitchen sink.
Make sure that you don’t run into any of these problems when purchasing a foreclosure
2. Unpermitted Changes
Usually, when a previous homeowner makes a renovation to their home, it is a good thing. Improvements can only add value to a home, right?
Sometimes, these renovations can be ugly, unnecessary, and even illegal. If they didn’t get the proper permit to make these changes, the responsibility falls on you. Don’t run into a mess of legal ramifications for an unpermitted “improvement”.
One of the more common examples of this phenomenon is a garage being converted into a living space. The homeowner will let another person or people live in the garage to help pay the mortgage.
3. Ceiling Stains
A water stain on the ceiling, wall, or floor, usually indicates bad news. Both the cause and the effect require money to fix, and could sink your project if they are substantial.
One of the main causes of a ceiling stain is a roof leak. A simple patch up might be enough to fix your leak. However, if the problem is greater, you might need to buy and entire new roof.
A leaky roof can cause a number of additional problems. These problems include rotting wooden support beams and waterlogged floors. Additionally, a leak could even cause a mold problem if left unattended.
4. Cracked Foundation
Before purchasing a house, one thing you should always have an inspector check is the foundation. Foundation problems are one of the most expensive repairs and should never be approached lightly.
Some foundation cracks are worse than others. Vertical cracks are considered less serious because they don’t harm the integrity of the structure. Horizontal cracks, however, are a much mores severe problem.
If you’re the foreclosure you’re thinking of buying has any sort of horizontal crack in it whatsoever, you might want to close your checkbook and get the hell out of dodge as soon as you can.
5. A Long Period of Vacancy
Although this problem won’t apply to short sales, vacancy is often a problem when dealing with a foreclosure or an REO.
First, a vacant house is a prime target for vandalism. Broken windows, holes in walls, and spray painting are common occurrences in abandoned homes. Additionally, vagrants will often strip the copper piping throughout the house and sell it for cash.
Even if the home doesn’t get vandalized, the home can get deteriorate on its own. Moisture can get trapped causing mold, and lawns and gardens can become unruly. Also, weather can destroy the home. The pipes might freeze if the house wasn’t properly winterized. Flooding could destroy the basement, or the roof could even cave in from a heavy snowstorm.
Like This Post? Be sure to read Part 2 when it is released on Friday, July 12th!