Beware those Distressed Property Deals

We’ve all heard that purchasing short sale, bank-owned, or foreclosure property will come with a nice discount. That might have been true a few years ago, but those deals are largely gone. The lure of saving a lot of money causes some buyers to overlook what would otherwise be quite noticeable.

The fact of the matter is, more savvy investors are passing on these leftover properties precisely because they know these homes are going to cost more than they’re worth. The discounted price, which can range up to 20, or even 30 percent, hides the real cost of rehabilitation. Even in instances when you’re able to take advantage of the 203k loan program, you’re likely to end up in a money pit.

While the home appraisal would reveal how much the property is truly worth, it won’t include the laundry list of improvements you’ll need to make and the associated costs. Even if you’re able to have a contractor tag-along to give you an estimate, such projects typically come with inevitable, unpleasant, and expensive surprises.

Distressed Means Little Disclosure

One of the largest problems with purchasing a distressed home is they are sold in as-is condition. Banks will only address major issues with the property, which seems to be a good thing; however, that leaves many other issues you’ll have to take care of on your own.

“Banks that were eager to lend money in appreciating markets sometimes allowed borrowers to over-mortgage the home, meaning the borrower’s loan balance exceeded the value of the property. Appraisals are subjective, and not all appraisers will place the same value on a home. Although against the law, some appraisers are pressured by banks to appraise at the amount the homeowner wants to borrow.” —

Because these homes sit vacant, many are vandalized and those that aren’t still suffer from a state of deterioration. It takes years for a foreclosure to work its way through the legal system. Many people are familiar with the law, including the previous owners. That generally causes them to simply walk away from the property once they receive the delinquency notice, or are served with a foreclosure complaint, thinking they’ve run out of time.

Short sales are another matter. The homeowners are allowed to stay in their residences, but must maintain it. However, it isn’t unusual for the homeowners not to have the financial resources to actually do so; and, many opt to take appliances and other items with them.

Why Distressed Property Deals don’t Always Deliver Real Savings

There are several reasons that make a distressed property a bad investment, here are a few of many:

  • Liens against the property. It isn’t at all unusual for there to be liens against a home in these situations. Cleaning up the mess can be extraordinarily time consuming and costly.
  • Problems lurking in the plumbing and electrical wiring. Because these properties are vacant for a few years, the plumbing and electrical wiring have not been maintained. The cost of replacing or repairing plumbing and electrical issues, as everyone knows, is not cheap.
  • Pest infestation problems. Though the previous owners might have moved out, bugs have moved in. It’s not just the cost of ridding the property of pests, but also the cost to repair any damage they’ve caused.
  • More time and more money to close. Banks don’t typically rush to close on these transactions, and, they don’t put anything into the settlement fees. All of those will fall squarely on your shoulders, which, ironically could jeopardize the chances of your financing being approved.

Last but certainly not least, is these types of properties tend to be found in the same neighborhood. That will act to suppress the value of your home for the foreseeable future, if you choose to buy it.