Foreclosure Article / Checklist

Everything You Need to Know About Researching Foreclosure Properties

Whether you’re buying pre-foreclosure, foreclosure, or REO properties, doing your research is essential to make sure you’re getting a good deal.  However, it’s especially essential that you do your research if you’re focusing on foreclosure or pre-foreclosure properties.

Why?

Because these properties are generally sold as-is.  That means that not only is the property itself sold as-is, but the title is sold the same way. So you may encounter plenty of unpleasant surprises, such as a home that requires a lot of repairs or a title with liens and outstanding debts that you must satisfy before you can get a clean title.  (Later on in this book I’ll share with you a few horror stories about people who didn’t research these liens before bidding!)

          Quick definition: a lien is a legally recorded claim against the property, usually due to an outstanding debt.  Once the debt is cleared, then the lien is cleared off the title.

Side Note: What about disclosures?

If you’ve ever bought or sold any regular real estate properties, then you’re probably quite familiar with disclosure forms. By law, sellers are usually required to disclose any known defects or other possible negatives.  This may range from everything from problems with mold to wiring problems to flooding problems.  It may also include things like whether pets ever lived in the home.

However, these sorts of disclosures usually don’t apply to foreclosure auctions. And that’s because the bank doesn’t have any knowledge of possible defects or other problems, so they can’t disclose what they don’t know.  As such, you truly are buying the property “as is.”

Since it’s difficult to inspect the inside of a property (more about this later), the condition of the interior of the home may be completely unknown to you.  That’s why it’s so important for you to follow all the research steps listed here, as it will greatly reduce your risk.

Here’s how to do your research…

Inspect the Property

When a person’s home goes into foreclosure, there’s a good chance that he’s behind on other bills as well.  As such, you might find that some foreclosure homes are in fair to poor shape because the homeowner hasn’t been able to afford repairs and maintenance.  You may find big and small expenses, including but not limited to:

• Burnt-out light bulbs.
• Missing batteries in smoke detectors.
• Peeling paint.
• Appliances that don’t work.
• Rot or mold.
• Pest problems such as bats, termites and mice.
• Roof or structural problems.
• Worn carpet that needs to be replaced.
• Water damage (due to flooded basements, leaky ceilings, etc).
• Frozen or burst water pipes, which happens if the electricity has been shut off.

And so on.

You may also occasionally encounter what’s sometimes called “foreclosure rage,” where the homeowner purposely or even accidentally destroys property as he’s leaving.  You might find things like:

• Homes that have been stripped of the wiring and plumbing (as copper and other metals can be sold as scrap metal).
• Holes in the walls due to angry fists or feet.
• Electrical outlets in poor shape due to stripped wiring or plugs that were pulled out quickly.
• Cigarette burns in the carpet.
• And even outright acts of vandalism such as fire, broken windows, etc.

Your first step is to do a “drive by” to get feel for the condition of the outside of house.  If the home isn’t occupied, then find out if you can see the inside of the home before the sale.

TIP: If you are able to go inside the home, and you like what you see, then you may consider hiring a professional home inspector to create a report for you about the condition of the home.  This is inexpensive in the grand scheme of things, usually costing a couple hundred dollars – but it could save you thousands of dollars in hidden repairs.

In most cases, you’ll be unable to go inside the house or even step onto the property of an occupied house, as that’s considered trespassing.  The exception would be if you have the homeowner’s permission to inspect the property.

However, you’ll want to tread carefully.  Remember, this person has been hounded by creditors and is under great stress, so he probably won’t welcome you knocking on his door and asking to see the property.  Your competitors have contacted him already.  And he’ll probably feel like you’re a vulture trying to “steal” his property from him – and so you can expect to be met with some anger if you knock on doors.

TIP:  You may consider writing a letter to the homeowner in order to gain access. This works particularly well if you’re offering to buy the home and helping him to avoid closure. 

If you’re buying a REO property that hasn’t been repaired, then you may be able to submit a contingency with your offer, where your offer is good contingent upon a satisfactory inspection of the house.  In many cases, you’ll be allowed to inspect bank-owned property before bidding, since the property is often vacant.

If you are able to gain access to the property to inspect it, then you may want to get a professional home inspector to view the property with you. 

TIP: If you’re an investor, then you may want to get a home inspector for the first property you’re considering buying.  You learn a lot just by walking alongside a professional as he does his job.  After that, you may be confident enough to do the initial inspection yourself.

These are the sorts of things you should look for (this list is not exhaustive – you may want to consult with a professional):

• Does the house have any special security features such as motion detector lights, alarms or other home security systems?  Is there a deadbolt lock on the door?  Are there locks on the windows?  Are there solid locks on sliding glass doors?

• Look for evidence of pest problems, such as wood destroyed by termites, bat droppings, mouse droppings, “nests” or evidence of pests chewing on the walls or carpet, etc.  You may also see leftover pest traps and poisons left by the previous homeowner, which could indicate an ongoing pest problem.

• If the home has a fireplace, inspect both the fireplace and chimney for any evidence of damage.  Does it look like it works?

• Are the appliances clean and in working order?

• Is the heat on?  (This is important in the winter to avoid having the pipes burst.)

• Do you see any general damage or missing “pieces” such as missing window screens, missing storm windows, cracks or holes in the windows, floors, walls and ceiling, missing door handles, missing locks on doors, etc?

• Do you see any evidence of water damage?  Look at the ceilings and walls for telltale signs such as brown and yellow stains which may indicate a leaky roof.  In the basement, look for evidence of flooding.

• Do you see any evidence of mold?  At a minimum, you’ll need to look behind vent covers, under the carpet, in the basement and in the attic.

• Do you see any smoke or fire damage that might indicate a recent fire?

• Has this house been inhabited by smokers or pets?

• Is the electrical wiring and lighting in good shape?  Do you see any worn or bare wires?  Do you hear any unusual noises when you switch on a light such as a crackling sound?  Is the meter in good shape?  How about the circuit breaker box?  Also take note of the amp capacity.

• Is the plumbing in good shape?  Is there good water pressure and good drainage?  Do the pipes look good?  Do you see any leaks or evidence of leaks?

• Is the home well insulated?  This includes not only the actual insulation, but also well-constructed doors and windows.

• Is there adequate ventilation in the home (and in the attic)?  Is there a fan in the attic?  Is the fan in good shape (e.g., no broken blades)?

• How does the attic look?  Do the rafters and beams look like they’re in good shape?

• Are the heating and cooling systems in good shape?  If the home has an air conditioner – especially a window unit – run it to check the noise level.  If the cooling system is a “swamp cooler,” check for rust or mold.

• What is your general impression of the kitchen?  Be sure to look at the cupboards, counter tops, and flooring.  Also carefully inspect the kitchen around where the garbage can is kept (or was kept), near food preparation areas and anywhere there might be spills or crumbs, as sometimes these are the places where you’ll see evidence of an ant problem. 

• Look inside the closets.  Is there a lot of storage space?  Are the closets in good shape?  Are they well lit (and are the bulbs missing)?

• What is your general impression of the bathrooms?  Here you should see that the faucets, toilet, shower and tub all work well.  Look inside the medicine cabinet, check the closets and look at the condition of the mirrors. Also check for mold (as the bathroom tends to be a damp area).

• What is the general condition of the house foundation and structure?  Do you see any cracks in the walls, floors or ceilings?  Do doors and windows open and close easily?  If you put a ball on the floor, does it start rolling on its own?

• What is the general condition of the interior of the home?  How is the flooring, tiles and carpeting?  Do the walls need to be repainted?  Is there wallpaper or trim that needs to be replaced?  Are there fixtures that need to be replaced?

• Look in the basement at things like the hot water heater and furnace.  Is there any rust on the heater?  Does the furnace look to be clean and in good shape (check the filter, which can give you a clue as to whether furnace maintenance has been maintained).

• What is the general condition of the exterior of the house?  Here you should look at the foundation, walls, shingles/roof, and structure. (More about this in the next section.)

You’ll also want to look at the garage and any other sheds or outbuildings.   Check out the general condition of these buildings, and then take note of the electrical wiring, whether the buildings are heated, if the garage has an electric opener that works, the shelf space in the garage, whether the garage has adequate ventilation and so on.

Finally, be sure to also take note of what types of lighting is available outdoors.  Is there a porch light?  How about a yard light?  Are there any motion detector lights? 

Inspecting the Outside of the Property

In most cases where the house isn’t vacant, you probably won’t be able to gain access to the inside of the property.  In that case, you’ll need to use the condition of the outside of the property as a clue to what the inside might look like.

Here are a few things you need to look for:

• Check the landscape for potential problems.  Does it look like the house might be at risk for flooding?  Does the landscape slope towards the house and/or does the house sit in a low-lying area?  Do you see anything like trees that look like they might come down in the next wind?

• Note the overall condition of the yard. If the yard is in total disarray and full of trash, then you can bet the inside of the house looks about the same. 

See if you can find other clues that can help you determine how well the homeowners took care of the property.  Is the lawn mowed? Are trees trimmed? Are there well tended to gardens, flowers or decorations?  If there’s a fence, is it painted and in good shape?

• Check the roof. Here a pair of binoculars comes in handy. Check the roof to determine the condition of the shingles.  Do they look to be new or otherwise in good shape?  Or are they curled with some of them missing?

• Check the condition of the paint. Will this house need a new coat of paint before you sell it?  And is the paint merely dull, or is it cracked and peeling (i.e., it should have been painted long ago)?

• Look at the structure. Do you see any obvious structural flaws, such as a wall that appears to not be in alignment or obvious cracks (especially near the ground)?

• Look for cracked or broken windows.  If you see cracked or broken windows, that might be a sign of “foreclosure rage,” especially if more than one is cracked or broken.  In that case, don’t be surprised to see more damage on the inside of the home.

• Look at the surrounding property.  If there are any garages, sheds or other outbuildings, how do they look?  Also look at the cars in the driveway – if they don’t look like they’re taken care of very well, there’s a chance they haven’t taken care of their home either.

• Is there anything else that makes the property more attractive?  For example, is there a hot tub or pool outside?  Is it a fenced yard that can accommodate dogs?  Is it a larger yard with buildings and fencing that can accommodate horses?  (If so, be sure to also check that the regulations allow horses or farm animals on this property.)

• Check if the utilities are on by driving by a second time at night.  Finally, you’ll want to drive by once more at night, which can help you determine if the electricity is still on.  It may also give you a quick glimpse of the inside of the house. While looking through a window quickly as you drive by won’t give you too much information, you may be able to spot a clue such as a messy house, a hole in the wall, etc.

Gather Records

The next thing you’ll want to do is run a full title check on the property. And that’s because a title check will uncover liens for outstanding debts on the property. You may uncover things like:

• Back taxes owed on the property.
• Income taxes owed by the homeowner.
• Past-due utility bills.
• Unpaid construction debts (AKA mechanic’s liens).

And other unpaid loans and expenses.

TIP: Some liens are unrecorded, such as homeowner association fees. Be sure to buy title insurance if you win the property to protect yourself from these “hidden” debts.

The reason this is important for you to know is because these liens and debts become your responsibility if you buy the property at a foreclosure auction. You cannot get a clean title on the property until you take care of these debts.  Obviously, these debts will cut into your profits, so you’ll need to bid accordingly.  (More about that in a moment.)

You’ll also want to pull up all other public records on the property, such as land records, zoning records and even waste records.  These records will help you spot any potential problems with zoning issues, tax issues and similar.

TIP: You can check the county records to obtain these documents, or you can have a title company or an attorney search for these documents for you.

I cannot impress on you enough how important it is for you to do a title search to uncover these liens.  A house that you thought was a good deal can easily turn into a nightmare if you skip this step!  (Later on I’ll share with you a story about how a bargain turned into a money pit due to the buyer’s failure do a simple title search!)

Research Comparable Sales

The next thing you need to do is find out what other similar properties in the same neighborhood have sold for recently – this is called researching comparable sales.  Doing this will help you estimate the market value of the property you’re interested in.

Real estate agents typically run these sorts of reports, so you could hire a professional to create a report for you.  Indeed, in years past you often needed to hire someone to get your hands on this research.  However, the technology has made it possible for anyone to get this information online.

Here are some of the most popular websites you can use to get your comparable data:

[insert links]

The reason I gave you seven different websites is because you’re going to get different figures from those sites.  If you use just one site, you’ll probably get an inaccurate picture of the current market.  That’s why you should do what I do – use several of the sites, get an average figure for similar properties, and base your estimate on that average.

As mentioned previously, you’re looking for similar homes in the same neighborhood. That means you should look at things like square footages, number of bedrooms, number of bathrooms, size of the lot, which schools are closest, zoning restrictions, quality of construction and the like.

TIP: Usually you want a list of at least 10 or 15 similar properties that have recently sold in the same neighborhood.  The more recently these properties were sold, the better (as market conditions can and do change). 

If you’re looking at properties that were sold more than three or four months ago, make sure that you also have some knowledge of market conditions.  That way you’ll know if the properties were sold for a higher or lower amount than the current market.

Check Out the Neighborhood

Your next step is to check out the neighborhood.

You can start your research simply by driving around the neighborhood when you inspect the property.  As you drive around, take note of the following (if you’re an investor, view it as if you were looking at the neighborhood as a potential residence):

• What is your overall impression of the neighborhood?  Does it feel “safe” to you?  Does it look like someplace you’d like to live?  Is there anything distracting like graffiti, unsavory characters congregating, etc?  Do you see children playing outside? (That’s a good sign.)

• What is the general condition of the area?  For example, are the roads and sidewalks in good shape?  Are there any buildings in the area that are boarded up or otherwise in poor shape?

• How do the other houses in the neighborhood look?  Are they in good shape?  Or do they look neglected with peeling paint, lawns that aren’t mowed, dilapidated buildings and fences, trash in the yards, etc?

• Is there anything distracting nearby, such as railroad tracks and airports that will cause a lot of noise?  Is the home on a busy road or on a quieter side street?

Is it near anything else that may be noisy for the homeowner, such as being located near a university (especially if the nearby homes are rentals) or located near bars and other nightlife? (Note: Some people will consider living near a university and nightlife a plus.)

• What are the advantages of living in this neighborhood?  Is the house within walking distance of public transportation, such as a bus line, subway or trains?  Is it near a school?  Is it near a shopping center?  Is it near a hospital?  Are there nice parks in the neighborhood?

Speaking of which…

• What is your general impression of the schools, hospitals, parks, and public transportation stations in the area?  Do they look clean, safe and modern?

After you’ve physically inspected the neighborhood, then you’ll want to do some other research to find out the facts and figures related to the neighborhood.  These include (but aren’t necessarily limited to):

• Find out the crime rate in the neighborhood.  Is it lower or higher than surrounding areas? Does it seem to be on the incline or the decline (or holding steady)?  Also look at what type of crime these statistic represent (e.g., violent crime).

• Research the schools in the area.  Are they generally considered “good” schools?  You can find out even more in-depth information such as average class size, spending per student, facilities available (such as how much equipment is available in the fitness center, how many computers available to students, how many books in the library, etc).

• Are there sex offenders or pedophiles living in the area?  You can find out by searching the sex offender registries on sites like: http://www.familywatchdog.us/. 

• Consider general information about the area.  Is it a growing area?  Are there jobs available?  What is the average monthly living expense in the area?  What is the average property tax bill?  Does it look like a property that will appreciate?

Find Out the Minimum Bid and Other Information

The information you’ve collected so far will give you an idea of how much the property is worth and how much is owed on the property.  Before you start determining your maximum bid, you’ll also need to find out the minimum (starting) bid at the auction.

Usually, the auction ad lists this information right in the newspaper or Notice of Sale.  If you found out about this auction through another source, then you’ll want to either call the trustee or get a copy of the Notice of Sale to obtain this information.

In addition to giving you the minimum bid, the Notice of Sale will also inform you about other possible fees you’ll have to pay at the auction.  Some auction companies require that the winning bidder pays a “buyer’s premium,” which is usually about 5% of the purchase. 

So for example, let’s suppose you purchased a home for $100,000 at this auction. If the auction house charges a 5% premium, then you’ll need to pay the $5000 premium for a total of $105,000.

Quick Recap

You’ve just discovered how to thoroughly research a property, from doing a physical inspection to researching the neighborhood, crime rates and the schools in the area. You’ve also learned how to uncover “hidden expenses” on the property such as liens and other outstanding debts that become the buyer’s responsibility.

Now that you’ve collected all this information, you should be fairly confident about the market value of the home and what price would be considered a good deal.  In the Bidding chapter in this manual, I’ll show you exactly how to determine your bid price… even if you’re unsure about the interior condition of the property!

But first, let’s take a look at what you can expect when you go to a typical foreclosure auction…