Flipping a Foreclosed House Part 1: Assessing and Buying
Flipping a foreclosed house can be a great investment—with nearly a third of all home sales consisting of homes in some stage of foreclosure in recent quarters, there are bargains to be had for home buyers and rookie house-flippers alike. However, the process to assessing and purchasing a foreclosed property is complicated, and certainly not as smooth as reality shows like Flip or Flop make it seem. Foreclosed properties are inherently risky, that’s what can make them so profitable. Let’s dive into what you’ll need to prepare for in order to make a smart investment.
What You’ll Need
Preapproval letter: Unless you’re going in armed with some serious cash, you’ll need a pre-approval letter from a lender. Some first-time buyers assume that the bank selling the foreclosed property will also finance the mortgage on it, but make no mistake; the bank is trying to unload bad assets, not sell homes. With the speed at which foreclosed homes can be sold, you’ll want to go into the process with your finances squared away.
A bank’s broker: In order to get an edge on the competition, you’ll want to seek out an agent connected to a bank selling foreclosed properties. Banks often hire real estate agents to handle the sale of their foreclosures, and it’s far easier to deal with a property through them directly instead of through a buyer’s agent. Plus, bank’s brokers will know of properties that aren’t listed yet.
Property inspection: For a decent price, a certified home inspector will be able to get a detailed assessment of a prospective property that will give you a better idea of the condition of your potential asset and help you prioritize repairs.
Information on the house’s history: Since you’re looking to acquire an asset, you’re going to want as much information as possible on your prospective houses. Info on the house’s history will help you gauge the age and health of the structural and mechanical elements of your property. Many states require the completion of a Seller’s Property Disclosure Statement (SPDS) for home sellers. Ask for it.
What to Look For
Foundation or exterior damage: Thoroughly investigate the property for leaks, roofing problems or other exterior damage. Cracks and irregularities in the foundation in particular can indicate fundamental structural issues with the property that are the most expensive to resolve.
Functionality of utilities: One of the biggest issues with foreclosed properties can be the state of their utilities. Many brokers recommend assuming that A/C and heating systems will have to be renovated or replaced when estimating costs, and for homes that have been abandoned or foreclosed for lengthy periods of time, you’ll need to contact the appropriate companies to get things turned back on and assure that your water lines are pressurized and your electrical systems are safe.
Health of plumbing and sewage systems: When investing in a home inspection, you may also consider paying for a sewer scope and plumbing inspection. It may be extra money, but the problems created by bad plumbing can be catastrophic and bank-breaking.
Comps: Much like in traditional real estate, you’ll want to seek out the values of comparable properties in the area when determining your bid. Competition for foreclosed homes can be fierce, but there are no standard guidelines to the bank’s bottom line on price.
What to Watch Out For
Appliances, or lack thereof: Some homeowners who have seen their homes fall into foreclosure will have taken drastic measures to keep it afloat, including removing and selling various light fixtures and appliances. Prepare to see foreclosed properties stripped bare of even the basics. However, there are times that furniture and items get left behind. In these special cases, if the items left behind are in excellent condition, have them moved to another location while you renovate. You can then break them out for when you stage the property to sell.
Liens: If a foreclosed property has been left unmaintained by the bank or its previous owner, you’ll need to resolve any liens placed on it before the title can be transferred to you.
Security of the property: Because many houses are on a master lock system, that means for a foreclosed house that countless brokers, appraisers and contractors could have keys to it. You’ll want to replace all the locks and keys after you’ve purchased it.
If you follow these tips and arm yourself with as much information as possible on your prospective targets, you’ll be set to make a sound investment. With preparation, patience and a little luck, you’ll soon have acquired a fantastic property and be ready to move on to the next phase in flipping a foreclosed house.