The Hidden Dangers of Buying a Foreclosed Home

As the housing market collapsed, foreclosures were easily bought by anyone with some cash and a little hustle. Finding, examining, bidding on and closing the deal on foreclosures takes some work but the payoffs can be huge and make you feel like you won the lotto. But there are hidden problems that may turn your treasure into a money pit.

Know What You’re Buying

House purchases are complex, even when they only involve a single buyer and a single seller. When you involve government agencies, banks, auction companies and multiple parties that have a stake in the sale, you’re looking at something even more complex.

This is a lesson that Todd Phelps and Paul Whitehead learned firsthand in 2010 according to a New York Times article. After saving their money the couple purchased a home in Southern California. Like other foreclosure sales, they closed the deal on the steps of the local county courthouse. They thought that had bought a home free and clear for $137,000, only to find out that they had only bought the second mortgage. The house still had a huge unpaid primary mortgage.

Making things even worse, the auction company would not return their $137,000. The auction company claimed they were only a middle man and didn’t have any responsibility. Their realtor could not find or did not inform them about the multiple claims against the house. Wells Fargo owned both the first and second mortgage and tried stonewalling the couple. Finally, after initiating legal action and plenty of bad press, the bank relented and paid them back.

What You Should Look For

There are plenty of pitfalls out there, but that doesn’t mean you can’t find a great deal on a foreclosed home. You just have to be aware of the potential problems that could sink your deal and send you to home owner hell.

  • The Loan: Most banks won’t lend you money to buy a foreclosed property unless it’s in pristine condition and ready to live in. The FHA offers a loan program that can help you rehab a property, but for the most part, banks don’t want to deal with this. They would prefer to sell it to an investor with cash.
  • The Auction: If you don’t have extensive knowledge about the foreclosure auction process, then auctions can be dangerous places. Like Todd and Paul, you could end up buying something you have no idea about and end up losing a lot of money.
  • Mold: Homes that haven’t been lived in for several months often have mold problems. Once this gets into your frame and behind your walls, you would be looking at a huge rehab cost.
  • Vandalism/Sabotage: Homes without people in them are prime targets for vandals looking to destroy some property. Even worse, homeowners who are losing their houses have been known to sabotage the house, knowing that the bank or the opportunistic new buyer will have to pay out a ton of money to fix it. Concrete poured down toilets, power lines cut, holes punched in pipes and many more hellacious stunts are not uncommon.

If you’ve done your homework, or paid someone who knows this real estate niche to do it for you, then you can walk away with a deal and help out the local economy by getting a foreclosed home off the market. But, don’t get sloppy for fall for a deal that looks too good to be true or you could lose a lot of money and open yourself up to years of issues.