Foreclosure Properties Not Always a Deal, Experts Say

The bad economic news coupled with a weak labor market has seen a rise in distressed properties hitting the market. So if you’re looking for a deal on a house, buying a foreclosed home seems like a great idea right? Not so fast, said foreclosure experts. If you don’t know what you’re doing, it could end up costing you a lot of money.

By the numbers, according to AOL Real Estate, over the last 12 months, Poway's home prices have depreciated by 15 percent. There are 494 homes for sale in Poway, including 913 foreclosures. And between February and March of this year, foreclosures in Poway were up by 40 percent, according to DataQuick Information Systems.

“In today's environment, there are a lot of defaults and banks have a lot of inventories,” said Todd Beitler, co-author of The Complete Idiot's Guide to Buying Foreclosures.

But Calvin Goad, the owner of Poway Re/Max Associates, said if you haven’t done your research, you could stumble into a few pitfalls that may end up costing you.

One of the misconceptions about buying a foreclosed home is that you can buy it at auction for pennies on the dollar. Beitler said auction is the most dangerous option when buying a foreclosed home. 

“There are no inspections [on the property],” he said. “And you don’t know if there are any other liens on the property.” 

Often times with auctioned properties, you will not have the opportunity to inspect the properties until after you've bought it. Auctioned homes are sold as-is, damages included, Goad said.

Darin Redding, owner of Housecall Property Inspections, a San Diego real estate inspection company, says that damages to the properties are not always apparent when looking at the property from the outside.

“Without going inside the home, it’s difficult to find damages,” he said. “Damages often are not on the outside where neighbors can see.”

Redding, who spent 18 years as a home remodeler before becoming an inspector in 2003, said his experience makes him uniquely able to find creative ways the previous homeowners have intentionally damaged the property. 

“I’ve seen plumbing fixtures that have been loosened up, pipes intentionally cut in the attic,” he said. “You don’t know about the water leaks until you turned on the water to do the inspection.”

Emotions can run high during the foreclosure process and homeowners have been known to lash out by damaging their property. In one extreme case, a man in Ohio bulldozed his house in a foreclosure dispute. Because the homeowners know their property, they could damage it in ways that are not so easily detectable, Redding said.

“The sneaky ones will cut a small cut in the water line in the attic,” he said. “Unless you go into the crawlspace and the water pressure is up, it’s not something you can detect.”

The worst case he’d seen is when the previous homeowner poured concrete down the toilet

Goad, who has been buying and selling homes in San Diego and Poway for close to 30 year says there is a lot of due diligence that you have to do when it comes to buying an auctioned property, such as closely examining the title to make sure there aren’t any liens or second or third mortgage on the property.

“There’s a lot of work and you have to be tenacious,” he said. 

If you’re not careful, you could be buying the second mortgage or a tax lien on the property, leaving you on the hook for the first mortgage. This is what happened to Todd Phelps and Paul Whitehead who bought a foreclosed home at auction on the steps of the Riverside County Courthouse last October. Their story was chronicled by the New York Times.

The other pitfall is that you could be paying too much for the house, said Goad. 

“Ninety percent of auctions are overpriced,” he said. “And lenders usually take them back” to avoid taking a loss.

In addition, you could be buying a house with problems. Goad said there is a “Group of Five,” as he calls them, who are investors that specialize in foreclosed properties. They go around town buying properties that they know they can make a profit on. Goad would not disclose who the five are.

“If they’re not bidding, or stop bidding on a property, there’s something wrong,” he said. “Either you are you paying too much for the property or that property requires a lot of fixing up.”

Another way to buy a foreclosed property is through what is known as Real Estate Owned property, or REO, which is a property that has been sold back to the lender and all liens have been taken care of. In this type of property, the risk is minimal but you won’t be getting much of a deal either, Beitler said.

“You buy this property like any other properties,” he said. “The risk is pretty much removed and the title is clear; the reward, however, is not so great.”

REO properties have their own sets of problems. Even though the property has been fixed up and everything looks great, it’s just a façade, Goad said. The bank will fix things on the cheap, using the cheapest materials available.

“What you see is not what you get,” he said. “It is often harder to fix what the bank fixed.”

An inspection often will not reveal these kinds of problems, such as not cleaning the stucco properly before painting it, Goad said.

“You can’t inspect something like that,” he said.

Redding also agrees with that sentiment. He said you can’t inspect things such as cheap lumber being used for repairs.

The best advice Goad said he could give anyone looking to buy a foreclosed property is to take someone who knows what they are doing with you.  The broker in Phelps’ and Whitehead’s case did not know or was not willing to disclose that what they had bought was a second mortgage.

“It’s really important that the person is there to help you buy the property,” Goad said.

If you are planning on buying a foreclosed property, get someone who is knowledgeable about the foreclosure process, such as a certified distressed property expert. You can find one at cdpe.com. 

“Interview them, check their track records,” Goad said. “Get someone who does well for themselves, someone who believes in their products.”

Check out the next edition of for a listing of foreclosed properties.