New real estate investors often think of repossessions as a way to get started in the business. A repossession happens when property owners can’t pay their mortgage. The bank takes over the property and sells it to recoup its money.
The idea that an investor can make big money buying and selling repossessed properties makes sense from the outside looking in. A lot of people think they will get a steal.
Price Might Not Justify the Risks
What most people do not know is that most repossessions end up selling for market value and, on a few occasions, they sell for more. The banks want to get as much as they can so they’ll hire a real estate. Usually the real estate broker will list the property very close to its market value with the hope of attracting a lot of buyer interest and multiple offers.
The problem is that repossessions don’t come with legal warranty. The bank was never the property owner so it doesn’t have to provide any property history or declare any issues. You get what you get. If you find a hidden defect, such as issues with the foundation or water infiltration, you are stuck with it.
Waivers and Hidden Costs
When you submit a promise to purchase, the bank will make you sign an Annex A form, which means the bank is not liable for any irregularities in the house or property. And, you’ll likely have an added cost of $600-$900 for a new certificate of location, which will take 2-4 weeks to be completed. If that new certificate of location comes back showing any differences from your original understanding of the property, you are stuck with it because you’ve signed the Annex A.
Water Issues Common with Repossessions
A lot of repossessions have water issues. Not all do but be aware. These properties were repossessed because the owner did not have enough money to pay their monthly mortgage payments. Most times, because of the lack of money, the building has not been getting any attention or maintenance. So you will most likely see brick issues, old roofs, cracked caulking around the windows, cracks in the foundation… all of these problems allow water to infiltrate.
If you want to buy a repossessed property, make sure you work with a real estate broker and hire a professional building inspector. If it’s an old building, pay for extra reports on the foundation, structure, electrical wiring, and sewer/water main. If the house is in an area where builders may have used pyrite or asbestos, it would be in your best interest to test for these materials as well.
Be prepared to walk away if need be. Don’t get caught up in the emotion of buying. What is the point of buying a high risk building if you aren’t getting a great deal?
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