Property Condition
Foreclosure properties come in all sizes, shapes, and conditions. Because of the failing financial condition of the property owner, routine maintenance and necessary repairs are often postponed. As an investor of foreclosure properties, you need to inspect carefully any property you are considering purchasing.
If the property is still occupied by the defaulting owner, you can assume it is livable. But there could be extensive dirt, grime, damage, and neglect that could cost thousands of dollars to make the property acceptable to any other potential buyer. Sometimes referred to as an “ugly” property by investors, you will be surprised at how a previously qualified buyer may have suddenly trashed a property when his financial condition changed for the worse.
You also need to be wary of the deceitful homeowner that is now quite willing to hide a substantial property defect. Perhaps only discovered after occupying the property, the unscrupulous property owner is now willing to allow you to buy the property and find the problem for yourself.
A property defect could be the underlying reason for the loan default. The property owner, now aware of the problem(s), might have decided there is no reason to continue paying for the property. Realizing that repairs are costly and extensive, the buyer might have opted to give the property back to the bank. Be cautious, and try to discover everything you can about the current condition of the property.
The physical condition of the property is crucial for the real-estate investor. As an investor of foreclosure properties, you need to ascertain the extensive repairs versus cosmetic problems. The difference, of course, determines the cost of the repairs and your eventual profit. Unfortunately, when investing in foreclosure properties, the range of needed repairs can be quite large.
You will certainly fail as a foreclosure real-estate investor if you do not properly inspect each potential investment property. Too often foreclosure investors forget or overlook the basics. This can lead to costly mistakes and lost profits. For example, a simple termite inspection, something routinely completed in a nonforeclosure real-estate transaction, could be overlooked by the inexperienced foreclosure investor. It could cost thousands of dollars to repair the property, something that could have been avoided had you taken the time to order a property termite inspection.
Use a Professional Property Inspector
As part of your resources and your effort to perform your own due diligence on any property you are considering buying, you need to use the services of a competent and professional property inspector. These are the people that you hire to inspect and snoop around the property. Their goal is to find the property's flaws and defects and report them to you.
There are many professional property inspectors, and there are those that are not. It may take you a little while to find and build a relationship with a property inspector that you can trust and rely upon. Many states do not have any special requirements, beyond paying for a license, to become a home inspector. Some inspectors are more concerned about where their next dollars are coming from than attempting to do a good inspection on the property. Many inspectors offer video or DVD reports, using flashy technology to prove their services.
Rather than bells and whistles, you want an inspector that is not afraid to get on the roof and walk on it or get into a crawl space with spiders and rodents to see what is going on with the proposed property.
One place to locate qualified property inspectors is the American Society of Home Inspectors (1-800-743-ASHI (2744)). Their Web site is
The home inspector will not pass or fail a property. Rather she will endeavor to find all the potential problems with the property. Once she has located a problem, she will note it on her report. You will then have to decide what to do about the property after you have reviewed your inspector's report.
Always make sure that your purchase agreements include a property inspection clause. You always want the right to inspect a property when purchasing it, and you want the right to cancel the purchase based on defects or problems discovered during the inspection.
The cost of the home inspection will vary depending on geographic location and will depend on the services you order. With a home inspection service, it is not always best to pick an inspector based solely on price. You want to pick an inspector that is going to work with you, be objective and fair, and let you know exactly what the problems are with the property.
You may question if the cost of the inspection is necessary. The answer is obvious. It only takes one sour deal, caused by the lack of inspection, to validate the costs of many inspections. Don't overlook the importance of the inspection process on any potential foreclosure property investment.
Property Defects
Assume there are defects with the foreclosure property and that the current defaulted owner will do everything possible to keep you and your home inspector from finding those problems. Your inspection should look for these kinds of problems:
Electrical problems and hazards
Fire hazards
Termite infestation
Rotting wood
Cracked or sinking foundations
Structural damage
Roof damage and leaks
Mold problems
Stripped, nonworking, or damaged mechanical systems
Damaged, leaking, or collapsed water line
Damaged, leaking, or collapsed sewerage line
Damaged or missing roof gutters and downspouts
Water damage
Moisture problems
Safety issues
Building code violations
It is usually a good idea for the property owner to be present when you and your home inspector are looking at the property. As your experience with inspecting properties matures, you may want to do your own preliminary inspections. As you learn what to look for, you can determine if a particular property is one that you want to have professionally inspected.
You need basic tools to complete inspections. From the obvious — clipboard, flashlight, checklists — to the tools of the inspector — ice pick, digital camera, voice recorder — you need these items to determine the condition of the property. One of the advantages of having the property owner present is to question the problems and concerns you have. When you find a defect, ask a question like, “How long has this been damaged?” Most likely your reply will be, “I didn't know there was a problem.” Nevertheless, you are starting the process of setting up the expectation that you will not be paying top dollar for a defective property.
Environmental Issues
Mold issues can stop a prospective homebuyer from proceeding with a sale. The Environmental Protection Agency (EPA) offers free information about mold. It is readily available from the agency's Web site:
You can also use the EPA to determine if the foreclosed property is located near any known hazardous waste site. The agency's Web site offers information about problem sites at
The EPA Web site also includes good information about lead paint. Properties built before 1978 may pose a lead paint hazard. You can learn more about the Residential Lead-Based Paint Hazard Reduction Act, as well as learn how to abate the problem, on the EPA Web site.
According to the EPA, lead from paint chips, which you can see, and lead dust, which you can't always see, can be serious hazards. Peeling, chipping, chalking, or cracking lead-based paint is a hazard and needs immediate attention.
Lead-based paint may also be a hazard when found on surfaces that children can chew or that get a lot of wear and tear. These areas include:
Windows and windowsills
Doors and doorframes
Stairs, railings, and banisters
Porches and fences
For more information on lead paint, visit:
Check Out the Neighborhood
Consider the location of the foreclosure property. What could look like a good deal during the day could be a terrible choice at night or vice versa.
You need to understand what the neighborhood is like during the different hours of the day. Some neighborhoods fill with intoxicated persons, noisy cars, and loud music in the evening hours. Others are quiet at night but are loud during the day because of business activities. Visit the property, and the neighborhood, at different times to gauge any other problems.
It is always good to visit after major weather storms. Check out flooding, standing water, and drainage. See for yourself how the water flows near the foreclosure property. Look for any environmental issues during your neighborhood visits.
