An Inspector Looks At Foreclosed Properties
by Kevin Smith
With all the commotion in the subprime lending industry right now, the probable almost certain outcome is that
there are going to be a lot more foreclosed houses coming on to the market. For the investor this may open the doors to some opportunities. As with anything else that you are going to invest in, you have to know some basics about what you are getting yourself into. The better informed investor makes better decisions, and better decisions mean better profits.
This article is about what an inspector sees in helping his clients to evaluate an investment property. Foreclosed properties have problems that other properties usually don’t have. The owners have lost their house along with their credit; the wheels have fallen off their life. Things look pretty grim for them, and there is often a lot of anger associated with losing your home. That anger sometimes gets taken out on the house. We will
talk lots more about that in just a minute.
Nothing good ever happened to a vacant house. The kids get in, the neighbors get in, and the scavengers come in and take things. Some of these properties can get to looking pretty rough, and the damage can be considerable. The lender owns the property and checks on it once in a while, but they don’t live there and to them it’s basically a file on the desk. If the house is in need of attention, it probably won’t get it from the lender.
Looks like a recipe for deterioration, doesn’t it? There are some things you should be aware of as an investor that will support you in making the right decisions about properties like this. Your due diligence before you buy needs to discover what needs to be fixed and what it is going to cost you to do it. That’s the basis for the project scope of work and budget, and that’s the backbone of the whole property investment. Let’s look at some things you need to be aware of and always look for in vacant or foreclosed properties.
People lived in these houses and people came into these houses after people stopped living in them. There may be belongings, trash, paper, boxes, car parts, dead lawnmowers, sports trophies and the all time foreclosure standby;
fake Christmas trees. There can be trash throughout the house, trash in the attic, trash all over the yard.
The plumbing and electrical fixtures may have been removed, wiring and plumbing may have been removed and there may be gratuitous vandalism as well. There could be damage to the exterior of the house, and most often the interior has received varying amounts of damage in one way or another.
There may be sabotage, where someone has thrown shrimp into the furnace or put drywall compound down the plumbing drains. The owners may have taken things with them like dishwashers and kitchen exhaust fans. If you see cabinet doors and drawers missing, or if the doors are gone, they’re probably not far. Little Joey across the street got mad at dad and put his fist through the closet door in his bedroom. The closet door that is missing from the foreclosed house has found a new home in Joey’s bedroom. Some folks see a vacant house and they think its O.K. to go shopping. That happens a lot in foreclosures.
If the lender has had it for very long, chances are it has been “trashed ou.t. That means that a crew has gone in and
taken everything out of the house. Everything that is not a part of the house is loaded onto a truck and hauled off to the dump. Gone. There may have been some repairs done like a new roof, or a wooden cover built over a swimming pool, but the lender is not in the business of repairing houses.
Houses have to be maintained. We need to paint them, put roofs on them, replace heating, air conditioning, water heaters, dishwashers, fences and so on. All of these things have useful life span, and then they have to be replaced. The bottom line is that these houses have a lot of deferred maintenance. All of these deficiencies must be cured before the house can be considered to be in a “good and marketable condition.”
To the investor that means that he will have to pay to fix what’s wrong with the house, and he must provide for that in his budget. It also means that these deficiencies can be used to negotiate a more favorable deal for the investor. Let’s look at some specific items.
The roof may leak, or it may have breached open. When rain gets inside the roof, the first thing it does is mess up the sheetrock. After it has been open with the rain coming in for a while, the sheetrock falls down onto the carpet or the furniture or the trash beneath it. If it is warm outside and dark inside the house you now have a terrarium capable of supporting all sorts of life forms. If this leaking or breach is not repaired, after a little longer the framing starts to deteriorate. It can all be fixed and made livable, but it all costs money.
If you have walked into the bathroom of a vacant house and smelled a foul odor in the bathrooms or the kitchen, it could be the drains. When the house goes vacant and nobody uses the drains, they dry out. When plumbing dries out and the P-traps go dry, it lets the sewer gas into the house. That’s the smell. When you turn the water back on the faucets may not leak right away, but check again in about three days. They have a habit of springing leaks. If the house has been vacant for a year or more, the washers in the faucets are normally cracked and too dry to work.
Another thing about plumbing. Water supply lines blow out. If the water is on when this happens and there is no one there to do anything about it, the house floods. After a while one of the neighbors usually goes by and shuts off the water. However, the neighbor seldom feels compelled to get the water out of the house. Now you have a mildew incubator. If you see a band of mildew about two feet high on the walls, this is probably what happened.
One more thing about plumbing. Most water meters have what they call a drip meter on the face of the dial. It is a little needle or triangle that is smaller than the other dials, or separate from the speedometer looking display. It is usually red. Here’s what it does. Turn off every faucet inside and outside of the house. Now make sure the water is turned on to the house, and then go out to the water meter. Look at the drip meter, if it is turning even a little bit, there is a leak somewhere in the house that needs to be found and fixed.
The utility companies will come and reclaim the gas meter on a house that has been vacant for a certain period of time. When the meters get old they no longer measure the gas going to the house accurately and the homeowner is getting more gas than he is being billed for. They take the meters in and rebuild them or retire them. In most municipalities you have to have a gas test from a licensed master plumber to get the gas turned back on. Trouble is, old gas systems start to leak like crazy after the pressure has been taken off of the system. To the investor that means possible costly repairs or replacement of old gas pipe in the house. That’s how some houses become all
electric by the way.
Gas fired appliances. When the gas is turned back on at a house that has been vacant, it might be hard to get the water heater, gas stove or gas furnace to light. That’s because air has gotten into the line. The gas supply line has to be disconnected from the appliance and allowed to flow or “bleed off” before there is enough gas there to light.
You will have the normal things that you look for in any house, foundation, doors and windows, carpet, paint, appliances, etc., but these are some of the special things that happen to vacant houses that you should be aware of. Give the property a thorough looking over before you commit to buy it, know what you’re getting into, provide for it in the scope and budget, and make the right offer.
Reprinted by Permission. The author, of Forward Assist, has conducted "Mr. Fixit" workshops, and served on the Realty Investment Club of Houston Board of Directors as “The Enricher” Newsletter Editor for three years. He shares his treasure chest of secrets with anyone who asks. You can reach him at (713) 858-1330