HomeBuyerFunds: Foreclosures and Repairs

A Foreclosure Buyer’s Guide to Property Repairs

One of the most overlooked and underestimated expenses involved in the
purchase of a home is the cost of repairs. Whether the problem is a
defective part in an appliance, a structural problem overlooked by the home
inspector or just Murphy’s Law making its presence felt, it’s rarely the
case that someone can buy a property and move in without spending at least a
few dollars to fix, repair or replace something.

While these types of expenses are generally minimal in new homes and
well-kept resale properties, they can be fairly significant when the home in
question is a foreclosure property.

As housing prices have escalated over the past few years, more and more
people have started to look at foreclosure properties as an affordable
alternative to more traditional real estate purchases. It’s not unusual for
a buyer to acquire a foreclosure property for 10 to 20% less than full
market value, and sometimes at much more dramatic discounts of 40 to 50% or
more. And online sources make it easier than ever to find
foreclosure properties. But while the savings possible on foreclosure
properties are real and really attractive – there are sometimes hidden costs

One of these hidden costs is the cost of repairs. Foreclosure properties
come in all shapes and sizes – from run-down mobile homes to palatial estates
overlooking the ocean. But they all have at least one thing in common: their
owner was in some state of financial difficulty. Generally, this means that
a property in foreclosure may not have been kept up as well as a home buyer
might like. It’s nearly a certainty that the typical foreclosure property
hasn’t benefited from the type of pre-sales “fix-ups” that many homeowners
perform to increase the sales price of their homes. And, as a rule, most
foreclosure properties are offered “as-is,” leaving it up to the buyer to
find anything physically wrong with the property.

Is it worth saving 1% on a home purchase if it means doing extensive
repairs? Probably not, for most people. On the other hand, saving $20,000 on
the purchase may make it worth your while to invest in home repairs.

Determining the degree of disrepair can be something of a challenge as well.
Early in the foreclosure process, when an owner is in Notice of Default
(NOD), he or she may not be interested in discussing the sale of the home,
making it impossible to do a thorough inspection. At the auction, or Notice
of Trustee Sale (NTS) phase, bidders are generally required to buy the
property as is, at the courthouse. And once the home has been foreclosed on
by the bank, becoming a Real Estate Owned (REO) property, arrangements to
inspect the property often need to be made with the lender.

Many investors routinely budget 10% of the purchase price of a foreclosure
home for repairs. In a typical scenario, where a property with an estimated
market value of $150,000 might be sold during the foreclosure process for
$120,000 – a 20% discount – that would amount to a repair budget of $12,000. In
this scenario, the homebuyer still saves $18,000 on the purchase price, and
likely increases the value of the home by doing the repairs. Each property,
and each situation, is different. But it’s important to note that a
difference of 10% in either the discount or repair costs would dramatically
alter the financial outcome.

Example 1
Estimated Value: $150,000
20% Discount: $ 30,000
Purchase Price: $120,000
10% Repair Budget: $ 12,000
Total Cost: $132,000
Total Savings: $ 18,000

Example 2
Estimated Value: $150,000
10% Discount: $ 15,000
Purchase Price: $135,000
10% Repair Budget: $ 13,500
Total Cost: $148,500
Total Savings: $ 1,500

Example 3
Estimated Value: $150,000
20% Discount: $ 30,000
Purchase Price: $120,000
20% Repair Budget: $ 24,000
Total Cost: $144,000
Total Savings: $ 6,000

If you’re interested in buying a foreclosure property, the following tips
should help ensure that you’ll really get your money’s worth.

1. Physically Inspect the Property
It’s imperative to physically inspect the property if at all possible.
In some cases, such as auctions, there is little or no possibility of an
inspection. However, if you are able to negotiate a deal with the property
owner directly during NOD, or pre-foreclosure, it may be possible to set up
a walk-through prior to conducting the sale. During the pre-foreclosure
period, the owner has a chance to sell the property or pay off the amount
owed before the property is sold at public auction or repossessed by the
bank. You’ll also be able to set up a physical inspection if you purchase
the property directly from the foreclosing bank after the property has been
repossessed. You can locate pre-foreclosures, auctions and bank-owned
properties by checking with the local recorder’s office or through online
services, which maintains the nation’s largest database of
foreclosure properties.

If you’re not able to physically inspect the inside of the property, assess
the property’s condition as much as possible by driving by and looking at
the exterior. Add extra padding into your repair budget for unexpected
problems. When there is no physical inspection of the interior, most experts
recommend that you cap your purchase price at no more than 70% of the
property’s estimated market value. You can determine a property’s estimated
market value using Comparable Sales, which are available through MLS listing
from your real estate agent or online through Zillow.com

You should never assume the property is in move-in shape simply because the
owner says it is. Even if the home owner is being completely honest, he or
she probably isn’t as accurate or objective in assessing the condition of
the home as most real estate professionals would be. And an owner may be
completely unaware of a major problem with the home. The bottom line is that
you need to do your own research and be as thorough as possible.

It’s wise to hire a professional inspector to come along with you. The
trained eye of a professional inspector is priceless in this case because,
regardless of how diligent you are in previewing the property yourself, you
will undoubtedly miss items an inspector would catch. Make sure the
inspector checks the electrical wiring and moisture levels, as well as
asbestos, lead and carbon monoxide levels, especially in homes built prior
to the 1990s.

2. Note Every Detail that Needs to be Fixed and the Estimated Cost for Each

Have your inspector provide a list of all necessary repairs and, if
possible, a ballpark estimate for what each of the repairs might cost. You
can also ask the inspector for professional referrals for each individual
problem area (roofing, plumbing, etc.). You can check with those
professionals for approximate costs. Either way, you’ll know the true cost
of the property you are buying.

If you find that your repair list is quite lengthy, you may want to
reconsider whether the property is actually worth purchasing. If you’re
dealing with home owners in default, you can’t expect them to have the
resources to pay for any repairs before they sell the house, but you can use
the cost of repairs to negotiate a lower purchase price. That’s why it’s
imperative that you accurately document every single repair cost.

If you buy a bank-owned property, the bank will have the resources to make
repairs, but they will roll their repair costs into the price of the house.
And the bank may not be as motivated as you to get the best prices for the
necessary repair work. If you want the best bargain, you’re often better off
agreeing to buy the house “as is” from the bank.

3. Distinguish Between Cosmetic and Structural Repairs
While you may be completely correct that the property could use a new coat
of paint and some fresh carpeting, your first concerns should be structural.
For most people, this can be tough because it’s inherently difficult to look
beyond a home’s aesthetic appeal when deciding whether or not to purchase
it. Beyond that, most people don’t really know how to determine the
structural integrity of a property, unless the defect is so obvious that the
home probably shouldn’t even be considered for a purchase. This is yet
another reason why it’s imperative to hire the services of a professional
inspector: to keep you on task when determining what repairs the property
actually needs to make it suitable for living.

Critical Items to Look for in a Home Inspection:
Evidence of pests such as termites.
Water damage such as flaking or rippled paint, stains or musty smells.
Dry rot, a fungus that causes wood to become brittle and crumble.
Faulty plumbing such as non-operational taps and toilets or signs of rust in
the water.
Old and outdated electrical wiring like knob and tube, which are fire

Especially with older properties, another point to consider is that homes do
require a certain amount of ongoing maintenance. It’s expected that any home
will at some point need a new roof or appliances. Don’t let this cloud your
judgment or turn you off. Instead, focus on signs of necessary repair such
as leaks in the roof or other damage. Make sure all appliances are at least
in working order and not emitting dangerous fumes. Overall, you should be
more concerned with damage than age.

This is not to say that cosmetic repairs shouldn’t be taken into
consideration. However, they should be prioritized properly, so that any
repairs that make the property safe and livable are taken care of first.
Your goal should be to prioritize a list of repairs from most to least
crucial. You can use the information for negotiation and keep yourself on
track for what should be handled first when you purchase the property.

The bottom line: know what your priorities are. Remember, while that
gold-colored crown molding might be an eyesore, replacing it won’t make you
sleep any better on a rainy night under a leaky roof.

4. Get as Much Information from the Owner as Possible about the Property’s

Aside from the tips mentioned, it’s a good idea to get some history on any
home you are thinking about buying. Actually talking with the owner of a
property about what has been done to it over time is a great way to learn
about potential flaws or concerns to look out for. You should ask what
repairs have been made and when, as well as whether any structural changes
have been made and whether these changes were permitted under the local
building codes. Inquire whether the seller has paperwork to back up repairs
that have been made. This information may alleviate suspicions you have
about repairs that have supposedly been made and may also be helpful when
applying for home insurance for the property.

Of course, you’ll only have the opportunity to talk with the owner if you’re purchasing pre-foreclosure. If you buy at the auction or from the bank, you’re buying from a third party who has no knowledge about the history of the property.

It’s important to estimate the cost of repairs when you purchase a foreclosure property, but your strategy for estimating those costs will vary depending on the status of foreclosure. You’ll usually have the most accurate estimate when you buy directly from the owner during pre-foreclosure because you’ll be able to conduct a complete physical inspection and find out information about the property’s history from the owner.

If you buy a bank-owned property, you’ll still be able to perform a complete physical inspection, but you should allow for a little extra room in your repairs budget because you won’t be able to find out about the property’s history. You’ll need to pad your repairs budget even more if you purchase a property at public auction, where you usually won’t be able to physically inspect the inside of the property.

When you properly account for the repair costs when buying a foreclosure, you’re much more likely to realize a great bargain on your next home or investment property.

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