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Buying a foreclosure flip

Posted by Northlut (My Page) on
Tue, Mar 6, 12 at 12:59

We are seeing a lot of houses that were apparently bought as foreclosures, cosmetically updated, and then flipped back onto the market as little as 3 weeks later. I'm willing to bet that a lot of the updates were done as cheaply as possible, and I am worried that there may be serious problems that were hidden. The thing is, some of these houses are in locations that are perfect for us, and have great floor plans. We may well have seriously considered buying them in their pre-update state. But I am nervous about buying one that has been flipped because I think we'd be paying a premium for upgrades that probably aren't up to our standards, and also because of the other potential lurking problems.

Are we making too much of this? Have any of you bought houses in a situation like this, and can tell me how realistic my concerns are? Are there good strategies for mitigating the risk beyond just having a good inspection as we'd do on any house?


Follow-Up Postings:

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RE: Buying a foreclosure flip

If you are concerned, purchase a home that is being foreclosed not one sold by a flipper and fix it yourself, if you get a homepath mortgage available on many HUD homes you can sometimes get loans for the items that need to be fixed, and put very little money down. However, make sure you understand the renovation costs including labor. Around my area most of the HUDs are going to owner occupants because they have a bidding period before the homes are opened to investors.

Many flippers know how to do good quality upgrades that are appropriate to the neighborhood inexpensively, some don't. You can expect a Lowes or IKEA kitchen not custom cabinetry, and it will probably look great for years to come.

If you buy any used (or sometimes new) home you can encounter shoddy workmanship, or hidden problems, either by a DIY homeowner or bad contractor.


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RE: Buying a foreclosure flip

I've read many times posters fear about flips hidden problems, wouldn't an inspection reveal the problem, just as it would pre flip? I would view the properties determine FMV, make an offer to include inspection, then don't worry. I know some are overpriced but you can determine the price if you even like the actual house.
Bottom line don't exclude a house just because it is a flip, approach it as you will any house. Does it fit your want list, offer what you determine it is worth. The seller then will decide for you if you buy it.


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RE: Buying a foreclosure flip

Around here, most flips are given the minimum in cheap new stuff and put back on the market at top price. I'd much rather have one pre-reno and do it myself, but I have to agree with the others--it doesn't matter whether or not it's a flip. Just look at it the way you would any other house. If you like it and think it's well priced, then what does it matter? Original owners overlook lots of problems, too.

If the house is a Homesteps house as opposed to homepath listing, those often come with a home warranty for a couple of years, for whatever a home warranty may actually be worth.


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RE: Buying a foreclosure flip

"wouldn't an inspection reveal the problem, just as it would pre flip?"

That makes sense. But, there are a lot problems that can be hidden temporarily, like moisture damage being painted over. Sometimes an inspector can see warning signs that make them dig deeper for something like that, but not every time.

That obviously can happen whether a home is flipped or not. But when you have investors or companies buying dozens or hundreds of homes and flipping them like we've seen around here, it doesn't seem entirely far fetched to think that they have become proficient at covering up issues in ways that makes them unlikely to turn up in an inspection. They have a bunch of experience with it, they know what will be red flags to inspectors, and they know how to make those things less obvious. And I think an individual homeowner is less likely to be an expert at that. Maybe this is all a figment of my imagination, I don't know, but I don't think it should be dismissed out of hand.

As for the homeopath loan, I don't know what that is, but cash flow isn't really the issue. We can afford to do repairs or updates if we need to without doing any weird financing, but we don't really want to embark on that kind of project unless we don't have a choice.


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RE: Buying a foreclosure flip

"I've read many times posters fear about flips hidden problems, wouldn't an inspection reveal the problem, just as it would pre flip? "

Short ownership periods can leave unknowns even from a conscientious seller.

They may not have owned the house during a single heavy rainfall, making them naive to problems.

In some places the disclosure rules are relaxed when the owner has never lived in the house.

You cannot disclose what you do not know.


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RE: Buying a foreclosure flip

"I've read many times posters fear about flips hidden problems, wouldn't an inspection reveal the problem, just as it would pre flip? "

Short ownership periods can leave unknowns even from a conscientious seller.

They may not have owned the house during a single heavy rainfall, making them naive to problems.

In some places the disclosure rules are relaxed when the owner has never lived in the house.

You cannot disclose what you do not know.

You are addressing disclosure problems, I agree, but I was addressing a normal inspection.
Bottom line, if I saw a flip I was seriously interested in, I would consider it. I would not discount it just because it is a flip. I know some flippers scam, but I wouldn't assume every one is going to try to scam you. In the moisture example, ask the inspector to use a moisture meter.
I don't walk through a house thinking the seller is trying to hide damage.


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RE: Buying a foreclosure flip

We have seen so many flips while house hunting in Florida. I agree with cmarlin20, there is a risk but you start to learn what to look for. We have seen some which were completely remodeled with new appliances,etc. They look good on the outside, but digging deeper you notice where corners were cut.

We've seen bathrooms where new tile was installed but the window sills were rotted. Toilets which moved (I think inspection would find this.) We've seen loose tiles (had some fall off the wall). We've seen old water heaters and AC units which were rusted out.

I don't know what area you are looking in, but you can learn a bit about the people (investors), who buy these houses. Florida has a lot of info on the County website. Some of these 'flippers' do this for a living. They own their own construction company and crew. They generally do a nice job and seem honest. We got to know some and learned to watch houses which were abandoned and suddenly had construction crews working there. You can walk up and start talking to the workers.

We also found bank owned homes where the bank hires a construction company to clean up and fix any problems. I felt safer with those houses.

Some flippers are individuals who hire unlicensed workers and do cheap jobs. Many do not pull permits and do things where they cannot get permits. Stay away from them.

Look for the trucks, sinks/toilets on the lawn! Walk up to the men and ask questions. Never found any who didn't let us in to see what was going on. Many are proud of what they are doing and show details you wouldn't noice, like repiping, new doors, windows. Most will leave the old AC and heaters so that would be the only expense.

We considered a few but they sold fast. Some we were leary about because most don't replace roofs or major problems.

Jane


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RE: Buying a foreclosure flip

"You are addressing disclosure problems, I agree, but I was addressing a normal inspection. "

A "normal inspection" is just about always a crap shoot at finding some problems.

It is pretty standard for a flipper to paint everything, so water stains from a leaking roof may not be visible anymore.

A purchase and renovate older properties, and have done foreclosures over the years. Mostly I concentrate on 'old lady' houses, but I had two foreclosures just last autumn that where REO by a bank.

After dealing with the bank idiocy (through my attorney) it was just one more hassle.


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RE: Buying a foreclosure flip

If there is constrution done, appliances/wiring done, ask to see the signed off permits. Go to the building dept, and ask what permits were pulled, and the job was finished. Many of these homes were done without permits.


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RE: Buying a foreclosure flip

Just a clarification on HUD/Homepath.

HUD and homepath are two completely different things. HUD homes can be purchased with just about any kind of financing BUT Homepath loans. HUD homes are sold on an auction basis, and if you want a fixer-upper you need FHA 203k type loans. Also, HUD auctions go to owner occupants first, then investors (flippers) if no owner occupants bid during the first round of bidding. Homepath financing is available only through Fannie Mae owned homes and has more stringent rules than FHA loans and are available only to owner occupants again.

In short, you can't go homepath on HUD, and you can't always use 203k's on homepath homes. And for buyers who are looking for a great deal, this can be a pain in the a**. We're about to close on our first home and we encountered this many times. Sucks!


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RE: Buying a foreclosure flip

i agree with asking to see permits. if you can't get them, walk and walk fast away from the house.


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RE: Buying a foreclosure flip

"i agree with asking to see permits. if you can't get them, walk and walk fast away from the house."

Permits and inspections do not guarantee anything.

I recently opened up a wall to find zip cord used to connect low voltage under cabinet lights inside the wall, and even junctions with wire nuts floating in the wall.

It was actually inspected as part of a kitchen renovation, with permits and signed off inspections.
Relying on permitting and inspections is NOT always adequate, and given the small amount of time an inspector often spends on each job, only liable to catch the grossest of errors (and plenty of those still get missed).


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