Bank Owned/Foreclosed Property Inspections

Home foreclosures are sweeping Southern Nevada like the perfect storm. Since 2007, the real estate market in Las Vegas has become saturated with foreclosed property listings. In some months, as high as 80% or more of resale transactions were attributable to bank owned home sales. While these properties represent great value and investment potential they also can come with some hidden risks. In this article we will discuss why having a home inspection is a smart up-front investment when considering the purchase of a foreclosed property in Las Vegas, Henderson and surrounding cities.

Foreclosed properties, also known as "bank owned" or "REO" (Real Estate Owned) homes, are homes in which a previous owner's right to the property was terminated, usually due to default. A foreclosure typically involves a forced sale of the property, the proceeds of which are applied to the mortgage debt. What's most important to know is that many if not most bank-owned properties are sold “as-is.” This means that the title holder (for this example, the bank) is not required to disclose known issues or defects as is required in a typical seller transaction. Many of these properties been in foreclosure status for several months and sometimes even years, and are likely to need maintenance; the extent of which can run into literally thousands of dollars. Buyers or investors in “as is” properties often ask why they should have a home inspection?  After all, if the bank won’t agree to negotiate for any repairs why would anyone pay for an inspection?  This question is best answered by quoting the old adage, "let the buyer beware." 

Because repairs are the sole responsibility of the buyer, in many - if not most- bankowned property transactions the odds of encountering expensive repairs are significantly higher. Having a home inspection will reduce your risk and may help you to avert a bad buying decision. In fact, a home inspection is very likely to be the best investment you make during your due diligence period.

Here's a short list of the issues that are common to most bank-owned properties: 

Overdue Maintenance - The issues most commonly found in foreclosure properties are the result of a lack of maintenance. These issues can start well before the home even enters foreclosure. A financially devastated and emotional homeowner may neglect even the simplest maintenance and repairs, such as replacing AC air filters, fixing small leaks, replacing leaky toilet valves and water heater repairs. They often ignore signs of minor problems that eventually turn into major problems. When financially strapped, and knowing that the bank is going to take the home anyway, a distressed homeowner may stop caring for the property, or they just simply can’t afford to fix the problem.

 Long-Term Vacancy - Many of the bank owned properties listed for sale in Las Vegas are investor 2nd homes that may never have been lived in or were rented out. When a home sits vacant with the utilities shut down for long periods of time, things like water valves, water heaters, AC compressors and furnaces can develop problems. When a water heater is filled after sitting empty for a long period of time it can leak. Sometimes unrepaired leaks resurface during the inspection or they are covered up. Moisture damage to interior ceiling and wall surfaces can easily be masked with a simple coat of paint. While the home inspector can't see behind the walls, an experienced home inspector knows how to spot evidence of prior leaks, water damage and previous repairs. 

 Vandalism and Abuse - In some extreme cases (and I've personally witnessed this on a number of my inspections) a desperate or distressed homeowner resorts to vandalism and sometimes even sabotage. I’ve witnessed where sink and tub drains were filled or sealed shut with caulk and concrete; damaged walls, missing or damaged appliances; broken outlets, severed plumbing lines . . . and the list goes on. Some banks will contract with a local real estate management company to maintain and oversee the property while it sits in foreclosure. Sometimes they do a good job of keeping up with the home. More often than not however I see where they have merely done cosmetic repairs just to keep the home visually appealing while it awaits a new owner. Keep in mind that all certified home inspectors in Nevada are required to identify, test and evaluate ALL of the major systems and components found in the home.

Disclosure - during a typical home inspection (whether bank-owned or not), previous homeowner repairs and renovations, and sometimes even structural modifications are encountered. In a bankowned property transaction, documentation such as invoices, receipts or permits, which are commonly available to a buyer in a normal owner/occupant resale transaction, do not exist. Historical information is lost and the risk of determining the extent of any past repairs for such things as plumbing replacement, water leaks, roof leaks, electrical modifications, structural renovations or additions, is placed squarely on shoulders of the new buyer. For example, there are literally thousands of properties in and around Las Vegas that have been built with defective plumbing (Kitec, Rehau) and hazardous electrical panels (Federal Pacific, Zinsco). An experienced inspector knows what to look for and can usually spot signs of previous, incomplete or unpermitted repairs and renovations, and known defects such as the products just mentioned.

If all of this is beginning to scare you, don’t be. The vast majority of bankowned properties for sale are structurally sound and require mostly routine maintenance and repair. Just remember, “as-is” means the buyer assumes the risk for ALL repairs needed. The consequences of not having a thorough home inspection are considerable. The peace of mind alone is well worth the $300 investment.