Prepare for repairs when purchasing distressed properties

by Dan Krell (c) 2009.

So you decided to buy a foreclosure! You’re excited and made arrangements for renovations to begin the day after settlement. But wait; there is an unexpected glitch- your lender is requiring the mold in the basement to be remediated before closing. Home buyers’ lenders requiring repairs to be made prior to settlement is a common scenario of buying a foreclosure or short sale.

Besides imposing qualifications for borrowers, lenders also impose minimal property standards for the homes being financed! Among the many types of items that lenders may require you to repair prior to closing include (but not limited to): mold, termite damage, faulty plumbing, or roofing issues. For FHA mortgages, the minimal property guidelines were notoriously strict in the past; the seller could almost expect a laundry list of seemingly nitpicky repairs from the FHA appraiser. However, recent changes to FHA allow more discernment from the appraiser.

It seems to be somewhat of a paradoxical situation: you’re buying the home as-is, but your lender is requiring you to make repairs to the home prior to settlement. If the home is a short sale you could ask the seller to make the repairs, but then again many home owners selling their home by a short sale don’t have the funds to make their mortgage payment let alone the resources to make any repairs. If the home is a foreclosure, the rule of thumb is that banks do not make repairs to their foreclosed homes. Even though the seller won’t make repairs, you still have a couple of options to save your transaction.

Since you decided that the home you are purchasing is such a bargain, you figure that you might do the repairs yourself. However, not all home sellers will allow you to make repairs prior to settlement because of their liability (such as in a foreclosure transaction where repairs are typically not allowed prior to settlement).

If the repairs are beyond your capabilities, funds are limited, or the seller will not allow you to make repairs, you might think that your deal is dead. However, one of the little known secrets to purchasing distressed properties is the FHA 203k mortgage ( The FHA 203k is similar to a typical FHA mortgage, but the difference is that the loan will finance the repairs and renovations to the home.

The FHA 203k mortgage is not provided by all FHA lenders. Since the FHA 203k has requirements that are above and beyond a typical mortgage, it is highly recommended that you seek assistance from a qualified FHA 203k lender. You can find local FHA 203k lenders at

Another option that was common in the past is to escrow repair funds. If the buyer’s lender allows, the buyer can place the repair funds in escrow at settlement with the intention to make repairs after closing. However, as underwriting guidelines and practices have become more stringent most lenders will no longer allow for escrowed repair funds.

Buying a distressed property is a great way to get a bargain, but the transaction does not always follow the “typical” home buying process. If you are buying a distressed home, it is a good idea to plan for all contingencies including unexpected repairs by consulting with qualified professionals.

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of April 20, 2009. Copyright © 2009 Dan Krell

Buyer beware when purchasing distressed property

Buying a bank owned home might be a great way to get a great deal on your first home or the home of your dreams. However, you will find that buying a distressed home from a corporate owner is slightly different than purchasing a non-distressed home from an owner-occupant.

When you are purchasing a bank owned home, the bank requires you to sign addenda that favor the bank in many ways. Foreclosed homes that are sold by banks are exempt from many disclosures, including the Maryland Residential Property Disclosure And Disclaimer Statement (which discloses the home condition as well as any latent defects). Additionally, banks selling foreclosures (and their real estate agents) will sometimes want to take control of the entire transaction by coercing you to use their vendors, including their title company.

First and foremost, the bank is selling the foreclosure in as-is condition. This means that “what you see is what you get.” Often, what you don’t see is what you get as well. The bank addenda will warn of possible mold and other hazards that may be in the home. Even the best of homes can develop issues due to having utilities disconnected as well as being vacant for many months. A thorough home inspection, that may include testing for environmental hazards, is highly recommended to determine the condition of the home.

Another consideration in purchasing a foreclosure is that the bank will only offer you a Special (or limited) Warranty Deed. In a typical residential transaction, the seller will provide to you a warranty deed that guarantees that the seller has the ability to sell the home, and all debts held against the home are paid. However, buying a foreclosure is a bit different in that the bank will only provide a deed that covers the period the bank has had ownership of the home. Owner’s coverage title insurance will usually protect you from title defects not corrected by the bank; however, as policies vary, you should read the fine print.

Lastly, your deposit will become non-refundable after a short period of time. The bank will give you a short period for due diligence (obtain financing, conduct home inspection, etc); be prepared to act quickly!

So, is it a good idea to purchase a foreclosed home? Buying a foreclosure could be a real coup for you- but you must do your due diligence. Before you write an offer on a foreclosure, line up your vendors (such as home inspector, title attorney, contractors) so you can act quickly by having your team determine the home’s condition and legal status.

Unfortunately, the proliferation of distressed properties has some real estate professionals believe that consumer protection laws do not apply (such as RESPA and Maryland’s Wet Settlement Act). Make sure you are well represented! As a home buyer, you have the legal right to choose your vendors (including home inspector, title attorney, lender, etc.).

If you are planning to purchase a bank owned home, it is highly recommended that you review these special addenda carefully as well as consulting an attorney if you do not understand what these addenda require of you. Remember, “caveat emptor” applies when buying a bank owned home.

Original published at

By Dan Krell

This article is not intended to provide nor should it be relied upon for legal and financial advice. Copyright © 2008 Dan Krell.