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Foreclosures and short sales often are bargains, but they can come with a raft of expensive problems.
Just ask Adam Melson of Philadelphia. Melson had looked at more than 2 dozen houses and he jumped at the chance to purchase a short sale home that seemed like a decent buy in a good neighborhood.
What is a short sale on a house?
A short sale happens when the homeowner sells the house for less than the amount owed, and the lender does not get all its money back. Typically, this happens when the home's value falls. A short sale occurs only with the lender's permission.
But $40,000 in renovations later, he feels differently.
RATE SEARCH: See the lowest mortgage rates on Bankrate.com.
Melson's home inspector had said the short sale house was fine -- just a little termite damage in the basement. But when Melson tore up the linoleum to repair a soft spot in the kitchen floor, he found the damage went layers deep.
"The boards supporting the kitchen floor were entirely eaten by termites," he says. "I also learned at this time that the kitchen sink did not drain anywhere. It drained openly under the house."
Melson ended up replacing an entire wall of his house. That was before his roof started leaking and he discovered thick, smelly mold behind the entire shower unit. "With several other things I wasn't expecting, I wound up hauling over 10,000 pounds of my house to the dump in rented box trucks," he says.
Know what you're getting into before you buy a short sale or foreclosure property and be mindful of these 5 common mistakes:
5 common buyers' mistakes
- Ignoring property problems.
- Skipping the home inspection.
- Ignoring legal and insurance information.
- Leaving too little time for closing.
- Falling hard for a bad home.
1. Ignoring property problems
Foreclosure property owners didn't want to leave.
"They'll often take that frustration out on the property," says J. Scott Steinhorn, a real estate investor with Lish Properties LLC in Cobb County, Georgia, with experience in foreclosures and short sales.
"I've seen a couple foreclosure properties where the previous owners clearly took a sledgehammer to the nice hardwood floors, the tiled showers and the cabinets, just to be spiteful," he says.
Empty foreclosure properties may suffer from issues that arise from neglect -- leaks, mold, termites, thieves, squatters and filth -- because the property sat vacant for weeks, months or years before purchase.
Two little-known loan programs -- the FHA 203(k) and Fannie Mae HomeStyle -- offer solutions to homebuyers who want to renovate. Get prequalified today with mortgage lenders you'll find on Bankrate.com.
2. Skipping the home inspection
Tag along on your home inspection. "Most of what we do is education," says Kathleen Kuhn, president of New Jersey-based HouseMaster, one of the largest home-inspection franchisers in North America.
Ask for repair estimates when an inspector notes a problem, or do some research online later that night. "Every homeowner underestimates how much renovation costs," Kuhn says.
You may wish to call in specialized inspectors to look for expensive problems such as termites, mold and structural damage, particularly if it's a common problem in your area.
3. Ignoring legal and insurance information
A typical disclosure statement would indicate if a house was in a flood plain or had any unpermitted renovation, Steinhorn says. Because bank-owned properties often sell as is without disclosure, buyers need to do a little extra research on the home's status.
Ensure that all renovations have been permitted and approved. "If not, and there is a problem, the city can cite you," says Brendon DeSimone, a San Francisco-based real estate agent.
4. Leaving too little time
Short sale and foreclosure homebuyers need to be aware that the sale won't necessarily close as quickly as it would for a traditional home. The short seller's lender must grant approval of either foreclosure terms or a short sale price which is less than the short seller owes. Even so, troubled banks may be overwhelmed with foreclosures and slow to respond.
"They aren't just going to let the house go," says DeSimone.
It's not always possible or even desirable to get a home loan from the bank that has a mortgage on the short sale you're buying. Try shopping today for the best mortgage deal on Bankrate.com.
5. Falling hard for a bad home
Don't assume you're getting a great deal, says Jim Randel, real estate investor and author of "The Skinny on the Housing Crisis." "Think of yourself as an investor," he says. Consider the house's condition, inspection, price and value dispassionately.
He suggests that you ask yourself these common sense questions:
- If you were to buy this property, could you afford to rent it out for as much as, or less than, your mortgage payment? Use Bankrate's calculator to estimate your mortgage payment.
- If the home's value drops another 20%, will you still feel satisfied with your purchase?
- How much money will you have to pour into the property to make it habitable?
Kuhn says that sometimes HouseMaster inspectors provide bad news, but homebuyers just won't listen. She says buyers declare, "This is our house and we love this house," despite a broken sewer line, rats in the basement or a collapsed (and rotting) roof.
In short, this may be the right time for you to buy a home, especially if you know what you're getting into.