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Tuesday, January 15, 2008

Foreclosures can be costly mistakes, even when you don’t buy…

With the explosion of foreclosure homes there has been a concomitant increase in the number of deals that end up going south. Lots of people are out making offers on the great deals that they think they see in the foreclosure market; however, a fairly high percentage of those deals never go to close and some of those failed deals can be quite expensive for the would-be buyer.

First-off, these houses are usually empty and have been winterized by the asset management firms that control them on behalf of the banks. That means there is often no power, no heat, no gas, and no water – nothing. The banks have the houses winterized because they don’t want to be charged for he costs of keeping them heated in the winter. If you go into one of these homes, there should be very prominent signs advising you that the house is winterized. That’s a good thing, at least from one point of view. A house that has no power or gas, and thus no heat, and is NOT winterized in Michigan at this time of the year is likely to have (or will have) pipe damage due to freezing of the plumbing. That’s a bad thing and can be very expensive to repair. So look for the winterized signs or for heat to be on in the house (even if it’s just set to 45-50 degrees).

The cost that I talked about above comes into play when you go to inspect one of these winterized houses. Winterization involves more than just shutting off the water. If done properly the company that winterized the house drained the water heater and blew out the pipes, using a compressor – much like they do when your sprinkler system is winterized. That involves time and equipment and has a cost involved. So when you come along with your offer and want to do your inspection, expect the property management company to charge you for the de-winterization and re-winterization of the house or they will insist that you have a professional do it and provide them with proof in the form of a paid receipt. It’s not free, no matter who does it, and normally adds about $200 to the inspection fee. and don't expect them to buy the arguement that you're going to buy the house, so why should you have to pay to re-winterize it. Too many deals fall apart later in the process for them to take that risk. You will have to do it, no matter what.

So, with a normal inspection cost of about $300-400 you can add the de-/re-winterization cost and all-of-a-sudden, you’ve got $500-600 into a home that you might not even want to buy, once the inspection results are in. I’ve had lots of grumbling buyers walk away from foreclosure properties that had major issues that they didn’t see until the inspection. That amount of money is not a trivial amount to just lose for most buyers. But, for some, the inspection is just the first opportunity to lose on the deal and still not end up with a house.

I had some young, first-time buyers who when through the $500 inspection phase and asked the bank to address two major issues that the inspection uncovered. The bank refused, as most do these days, citing the fact that the price was already low because the house was being sold “As Is.” In this case the buyers signed off on going ahead with the purchase, even though doing so made the earnest money deposit non-refundable (which they were made very aware of at the time). That is a fairly standard clause in the bank documents that you have to sign in order to buy a foreclosed home. This same clause removes as a reason for backing out any issues with financing of the home; so, you can’t come back later and claim that you can’t get a loan. If you are going for an FHA loan there may be lots of issues that need to be dealt with in order to qualify and the banks jujst aren't in a mood to do any of the repairs - so consider that, too. In the example that I'm using, two weeks later the young couple changed their minds, after considering all of the work that would be required to make the house really livable. By that time, it was too late. They lost their $1,000 earnest money deposit, too. That was quite an expensive lesson ($1,600) learned for them.

So, even if you don’t end up owning a money pit house, just the process of trying to buy one can be expensive. As a Realtor, I feel and obligation to warn and advise my clients about the risks involved, but I cannot make the decisions for them. I felt terrible about the young couple who lost their earnest money, but I had been very clear with them about the consequences of signing-off on the “As Is” acceptance of the inspection results. The inspection is your only real out on these foreclosure homes, so use it wisely.

There are some great deals out there and many foreclosed homes have little wrong with them; but, many are wrecks that someone has abused and should be avoided. You can tell if you’re in a real monster, because they’ve been stripped or vandalized or just deteriorated noticeably. Sometimes you just can’t tell until you do the inspection. And please, don’t let the $500-600 that you spend for the inspection become a ball and chain that drags you down into a pit. If the results are bad, get out immediately and feel fortunate to have escaped. If you don’t have $500-600 that you can afford to lose, then stop looking at foreclosed houses! They are a gamble and like any gamble you have to know your limits.

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