The Bottom Line's Buyers of Short Sales Mistakes!

5 Common Buyers Mistakes in a Short Sale

With hundreds of thousands of homes in foreclosure or on short sale lists, there's never been a better time to score a sweet deal. But discount-priced foreclosures and short sales can come with a raft of expensive problems.

Just ask Adam Melson of Philadelphia. Melson had looked at more than two dozen houses and he jumped at the chance to purchase a short sale home that seemed like a decent buy in a good neighborhood.

Melson's home inspector had said the short sale house was fine -- just a little termite damage in the basement. But when Melson tore up the linoleum to repair a soft spot in the kitchen floor, he found the damage went layers deep.But $40,000 in renovations later, he feels differently.

"The boards supporting the kitchen floor were entirely eaten by termites," he says. "I also learned at this time that the kitchen sink did not drain anywhere. It drained openly under the house."

Melson ended up replacing an entire wall of his house. That was before his roof started leaking and he discovered thick, smelly mold behind the entire shower unit. "With several other things I wasn't expecting, I wound up hauling over 10,000 pounds of my house to the dump in rented box trucks," he says.

There's a flood of properties on the market with lots of motivated sellers, says Jim Randel, real estate investor and author of "The Skinny on the Housing Crisis."

"The only people who are selling in a declining market are those who have to sell," he says.

Although they have to sell, you don't have to buy. Know what you're getting into before you buy a short sale or foreclosure property and be mindful of these five common mistakes:

5 common buyers' mistakes

1. Ignoring property problems.
2. Skipping the home inspection.
3. Ignoring legal and insurance information.
4. Leaving too little time for closing.
5. Falling hard for a bad home.                                                                                

1. Ignoring property problems
Foreclosure property owners didn't want to leave.
"They'll often take that frustration out on the property," says J. Scott Steinhorn, a real estate investor with Lish Properties LLC in Cobb County, Ga., with experience in foreclosures and short sales.
"I've seen a couple foreclosure properties where the previous owners clearly took a sledgehammer to the nice hardwood floors, the tiled showers and the cabinets, just to be spiteful," he says.
Empty foreclosure properties may suffer from issues that arise from neglect -- leaks, mold, termites, thieves, squatters and filth -- because the property sat vacant for weeks, months or years before purchase.
Yet in many states, banks are typically exempt from providing the disclosure statement typically required of a traditional seller. The statement outlines the condition of the property. "The buyer of a foreclosure is essentially starting from scratch when it comes to determining the property issues," Steinhorn says.
For example, a bank won't reveal whether the house is constructed from defective materials -- materials later resulting in class-action lawsuits, Steinhorn says. Most claims by homeowners in these lawsuits are subject to strict deadlines. You won't know whether the previous homeowner missed the deadline for court-ordered remediation or if the faux stucco is bad.
Short sellers will fill out the disclosure form. But while short sellers are motivated to sell and repair their credit, they could have skimped on essential maintenance of the roof, furnace, air conditioner and hot water heater.
"If a house is between 15 to 30 years old, there's a very good chance it needs some expensive maintenance," Steinhorn says.
Also, it's unlikely the cash-strapped seller has given the home a cosmetic facelift for years, Steinhorn says. So the buyer might have to update a bathroom featuring orange shag carpet, a wooden toilet seat and gold-foil wallpaper.

2. Skipping the home inspection

Clear your calendar and make time to tag along on your home inspection. "Most of what we do is education," says David Klemme, Co-Founder of California-based The Bottom Line, one of the best home-inspection businesses in North America.
Melson wishes he'd been more aggressive in asking questions during his inspection. "This is the time where the house is open for all criticism and inquiries," he says. "Maybe I was a little young and anxious to be living on my own again. But if asking another five questions could have dropped the price of the home another $5,000, I would have asked about everything."
Ask for repair estimates when an inspector notes a problem, or do some research online later that night. "Every homeowner underestimates how much renovation costs," Klemme says.

Some buyers are even doing an inspection before making an offer, particularly in areas such as Florida and California where foreclosures and short sales are numerous. While most inspections are done after the initial offer, with the sale contingent upon mutual agreement of remedies, a preoffer inspection allows house shoppers to walk away and find a better buy.
You may wish to call in The Bottom Line inspector to look for expensive problems such as termites, mold, and structural damage, particularly if it's a common problem in your area. "Mold gets more expensive to remediate the longer you wait, and it can severely impact your health and the property's resalability," Steinhorn says.
If you note sloping floors or cracks in walls around doors, windows and basement walls, bring in a structural engineer for a full report and repair recommendations.
Then do something not on the inspector's list: Knock on neighbors' doors. They may know something you don't.
"The seller is not there to disclose the crime from last year or the loud music down the block," says Brendon DeSimone, a San Francisco-based real estate agent.

3. Ignoring legal and insurance information

A typical disclosure statement would indicate if a house was in a flood plain or had any unpermitted renovation, Steinhorn says. Because bank-owned properties often sell as is without disclosure, buyers need to do a little extra research on the home's status.
If the property is in a flood zone, you may pay thousands yearly in additional insurance costs, and you may find it difficult to resell the property. You can read more about flood prevention and insurance at FloodSmart.gov.
Ensure that all renovations have been permitted and approved. "If not, and there is a problem, the city can cite you," DeSimone says.
Check with the local planning department and make sure there aren't any neighbors with plans to build an enormous house or to demolish an existing one, DeSimone suggests. "Any nearby plans or work would normally be known and disclosed by the seller, but not in the case of a foreclosure," he says.

4. Leaving too little time

Short sale and foreclosure homebuyers need to be aware that the sale won't necessarily close as quickly as it would for a traditional home. The short seller's lender must grant approval of either foreclosure terms or a short sale price which is less than the short seller owes. Even so, troubled banks may be overwhelmed with foreclosures and slow to respond.
"Banks are taking huge losses so they are going to do their best to get their money back, get the most amount of money or go after the seller to try to recoup something," DeSimone says. "They aren't just going to let the house go."
Sometimes legal troubles can also influence closing. For more than six months, Steinhorn has waited on one bank-owned property while the bank repeatedly pushes back the close date due to unresolved liens.
Steinhorn isn't moving into his investment property. But costs increase if you must extend your lease, find a storage facility or rent an apartment at the last minute.

5. Falling hard for a bad home

Don't assume you're getting a great deal in today's real estate marketplace, Randel says. "Think of yourself as an investor," he says. Consider the house's condition, inspection, price and value dispassionately.
He suggests that you ask yourself these common sense questions:

• If you were to buy this property, could you afford to rent it out for as much as, or less than, your mortgage payment?
• What if the home's value drops another 20 percent, will you still feel satisfied with your purchase?
• How much money will you have to pour into the property to make it habitable? If the problems are too costly, you might pass on this home purchase.

Klemme says that sometimes The Bottom Line inspector provides bad news, but homebuyers just won't listen. He says buyers declare, "This is our house and we love this house," despite a broken sewer line, rats in the basement or a collapsed (and rotting) roof.
On the other hand, Klemme says more buyers are taking off the rose-colored glasses and inspecting the house and neighborhood more thoroughly. A cooler, less-competitive market nixes bidding wars, home-inspection waivers and overextended budgets.

In short, this may be the right time for you to buy a home, especially if you know what you're getting into.