Without specialized knowledge about how to handle the purchase of a distressed home such as a foreclosure, short sale or REO, you could find yourself in dangerous territory. We are experts in locating and advising you through out the complete process of buying a distressed home.
The reason for buying a distress home can range from you being a contractor with some experience, or you might want to go through a construction or redevelopment process to create your customized dream home. Whatever reason it is the bottom line is you will eventually save money and buy into the equity of the home creating a viable investment for the future when you decide to sell the house.
The process of buying a distress home is very unique, and should not be assigned to a real estate agent that does not have any experience in this specific area. A Realtor having experience in both construction and acquiring homes at a discount is a MUST! We at Angel Realtors like to explain the process in these three simple steps:
1) Structuring the Finance
Depending on what type of rehab the home needs, it will dictate the type of financing that will be available or appropriate for the renovation.
The process of finding a discounted property is not very simple, there are specific traits that your Angel Realtors will look for in order to find the ideal property for your needs.
This is the most important step of them all, on doing your due diligence you need to analyze all of the repairs and make sure that the repairs are within your budget.
1) Structuring the Finance
If you are not paying all cash for the home then a professional mortgage broker will be able to help you in deciding your best finance option. There are three major types rehabs that a distressed property might need. They range from just cosmetic repairs to a complete rehab. Depending on what type of rehab the home needs, it will dictate the type of financing that will be available or appropriate for the renovation.
1) Structuring the Finance
While many short sales are foreclosures, not all foreclosures are short sales and not every short sale is in foreclosure. To further complicate matters, REOs are not short sales either, but some intended short sales can end up as an REO.
What is a Foreclosure Property?
A foreclosure property is a home in foreclosure — when a notice of default has been filed in the public records. It means the owner has stopped making mortgage payments and the lender has given notice that unless the payments are brought up to date, it will sell the property to the highest bidder.
Lenders can foreclose for other reasons, but the most common reason lenders file a notice of default is when a borrower is at least two payments in arrears.
What is a Short Sale Property?
A short sale occurs when a home owner is in foreclosure but before the property goes to public auction. Under a short sale, a lender must agree to accept less than the amount that is owed on the property.
Unlike a foreclosure, investors typically buy the home for even less because investors are not paying off the existing loan nor making up the back payments. Investors are striking a deal with the existing lender to take less than what the lender has coming to avoid dealing with a foreclosure.
What are REOs - Real Estate Owned?
Banks end up owning the property when nobody at the public auction bid enough to cover the amount owed against the property. REO homes are often considered the best way to buy a distressed property because the seller is already out of the picture. It’s just the investor, the investor’s agent, the bank and the bank’s agent who are negotiating the transaction. Some REOs can be purchased directly from the lender.
- Buying an REO is similar to buying a short sale except the property is already owned by the lender.
- The property was acquired by the lender through a foreclosure action.
- Often lenders will sell repossessed homes for less than the past loan balance.
- Bank-owned properties are called REOs, meaning real estate owned by the lender.
This is the last and most important of all steps. This is where you will do all of your due diligence, it will be a detailed analysis of all repairs and work that you will want or need to put it towards the house once you purchase. Your Angel Realtor will be able to help you or your trusted general contractor will be able to do a break down all repairs needed.
We always look at the 10 major items, that could make or break the deal:
1. Foundation Problems
Texas is in the Gulf Coast. The sub-soil is full of clay. Clay expands and contracts according to a the amount of water that is in the soil that surrounds it. When there is a lot of water in the soil the clay expands and lifts whatever is sitting on top of it, like a house foundation. If your inspector tells you that you have foundation problems, or you suspect that there might be a problem, get it evaluated. A structural engineer can do it, or you can have a reputable foundation repair contractor check it out for you and give you a bid for repairs.
2. Poor Drainage
Settling of the soil next to the house, poor initial grading and landscaping when the house was built, and poor management of rain water run off are the main causes of drainage problems. Poor drainage allows the water to sit next to the slab and that water goes into the soil surrounding the clay we just talked about. Not good. Remedies include such things as splash blocks, gutters, downspouts, re-grading the areas adjacent to the house, french drains and in some cases, cutting roots that have grown up to form a dam that blocks the natural drainage of water. Rain water is supposed to be directed away from the house and to the street, where it can flow into the storm drainage sewer system.
3. Roof Leaks
If the roof has leaks, the most common places for them to occur are at the chimney flashing, structural flashing, and roof penetrations. Roof penetrations are where anything goes through the roof itself, such as a plumbing vent, water heater vent, chimney and so on. Missing or damaged shingles or a roof that has reached the end of its life expectancy are other causes for leaks. Remember, a roof can be worn completely out and not be leaking at the time of inspection. You have to know what to look for when you evaluate a roof.
4. HVAC - Heating, Ventilating and Air Conditioning
Air conditioning systems tend to either run or not. They will work hard and long in DFW’s summers before they give up the ghost and just flat won’t perform. Lot of times the problem is as simple as a freon recharge or the replacement of a electrical contactor. Other repairs, such as condensor replacement, are more costly, and need to be considered when figuring up your offering price for the property.
Furnaces come in either gas or electric. Older electric furnaces sometimes need to have their little elements re-wired, They look like the wires inside your toaster, only they are 220 volt and rather substantial. Gas furnaces have a thing called a heat exchanger, and this heat exchanger can be a source of problems. It is metal, it rusts out, and can become dangerous. I recommend replacement of the whole furnace when the heat exchanger goes out, because the cost of the heat exchanger replacement is not that much less than replacing the whole furnace, and you will have a warranty on parts and labor if you go for the whole unit.
Probably the most common item on the list of Recommendations for Repairs in the electrical category is Ground Fault Interrupters. They are required within 6′ of sinks in kitchens and bathrooms, as well as all exterior locations, garages and whirlpool, spa or swimming pool installation. Another area where repairs have to be made is when the circuit breakers are the wrong size for the wire that is attached to them. Your inspector or a licensed electrician will be able to make the evaluation.
Another common problem is what I call «Stunt wiring». This is where the well meaning home owner decides that he knows enough about electricity to add lights to the corner of the house so that he can keep the Huns at bay at night. The usual scenario is miles and miles of Romex wire and connections that are no more than wires twisted together and a little piece of black plastic tape on them. Big No-No. Fire hazard.
Leaky faucets, leaky drains. Most home buyers would sooner throw a new faucet on a sink than to mess around with spending 2 – 3 hours fixing the old one (hunting parts, going to Depot etc.) Commodes that are not mounted securely on the floor, commodes that leak and pipes that leak in the attic or under pier and beam houses are also problems to look for.
7. Rotten trim and siding
This is Houston. It rains a lot. If you do not keep the house caulked and painted the water comes in and rots out the wood. Fascia, soffits, siding and window and door trim are all candidates for this type of deterioration.
8. Doors and Windows
Interior and exterior doors can stick, be damaged, become de-laminated (the thin covering of wood veneer begins to peel off because moisture has gotten behind it) or the house has been lived in rough. By that I mean that people use their shoulder or their foot to open the door, or a loose doorknob has been left unattended and using it has caused damage to the surrounding door surface. Windows get broken or the screens go missing. If you are considering the property as a rental, make sure that you know about the laws in the State of Texas that deal with securing rental property doors and windows. The windows must lock securely, and the exterior doors must have a locking mechanism that can only be operated from the inside of the house.
9. Water heater
If it is in the garage or in a room that opens directly into the garage it must be elevated 18″ above the finished floor. The idea here is to protect the burner or igniter in the water heater from coming into contact with gasoline or other volatile vapors that can cause fire or explosion. Other considerations when looking at the water heater are obviously water standing under the unit rust anywhere on the tank or single walled exhaust vent pipe.
This could be anything from a cooktop that doesn’t work to rotten fencing. It would also include such things a damaged decking, holes in the yard, repairs to attic framing and repairing non-functioning door bells. Pay attention to these odds and ends because they can add up on you and punch a hole in your budget.
The items that we have listed above certainly do not exhaust the list of things that can break or wear out on a house, but it does give you a basis of what to look for when doing your analysis. Remember to pay attention to all of the details that you will need to take care of to bring the house to a good condition before you make your purchase offer. After you buy it, any additional work that you had not planned on in your rehab budget will come as an unpleasant surprise.
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