Five Buyer Mistakes in a Short Sale

With hundreds of thousands of homes in foreclosure or on short sale lists, there's never been a better time to score a sweet deal. But discount-priced foreclosures and short sales can come with a raft of expensive problems.


Just ask Adam Melson of Philadelphia. Melson had looked at more than two dozen houses and he jumped at the chance to purchase a short sale home that seemed like a decent buy in a good neighborhood.

But $40,000 in renovations later, he feels differently.

Melson's home inspector had said the short sale house was fine -- just a little termite damage in the basement. But when Melson tore up the linoleum to repair a soft spot in the kitchen floor, he found the damage went layers deep.

"The boards supporting the kitchen floor were entirely eaten by termites," he says. "I also learned at this time that the kitchen sink did not drain anywhere. It drained openly under the house."

Melson ended up replacing an entire wall of his house. That was before his roof started leaking and he discovered thick, smelly mold behind the entire shower unit. "With several other things I wasn't expecting, I wound up hauling over 10,000 pounds of my house to the dump in rented box trucks," he says.

There's a flood of properties on the market with lots of motivated sellers, says Jim Randel, real estate investor and author of "The Skinny on the Housing Crisis."

"The only people who are selling in a declining market are those who have to sell," he says.

Although they have to sell, you don't have to buy. Know what you're getting into before you buy a short sale or foreclosure property and be mindful of these five common mistakes:

1. Ignoring property problems
Foreclosure property owners didn't want to leave.

"They'll often take that frustration out on the property," says J. Scott Steinhorn, a real estate investor with Lish Properties LLC in Cobb County, Ga., with experience in foreclosures and short sales.

"I've seen a couple foreclosure properties where the previous owners clearly took a sledgehammer to the nice hardwood floors, the tiled showers and the cabinets, just to be spiteful," he says.

Empty foreclosure properties may suffer from issues that arise from neglect -- leaks, mold, termites, thieves, squatters and filth -- because the property sat vacant for weeks, months or years before purchase.

Yet in many states, banks are typically exempt from providing the disclosure statement typically required of a traditional seller. The statement outlines the condition of the property. "The buyer of a foreclosure is essentially starting from scratch when it comes to determining the property issues," Steinhorn says.

For example, a bank won't reveal whether the house is constructed from defective materials -- materials later resulting in class-action lawsuits, Steinhorn says. Most claims by homeowners in these lawsuits are subject to strict deadlines. You won't know whether the previous homeowner missed the deadline for court-ordered remediation or if the faux stucco is bad.

Short sellers will fill out the disclosure form. But while short sellers are motivated to sell and repair their credit, they could have skimped on essential maintenance of the roof, furnace, air conditioner and hot water heater.

"If a house is between 15 to 30 years old, there's a very good chance it needs some expensive maintenance," Steinhorn says.

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Also, it's unlikely the cash-strapped seller has given the home a cosmetic facelift for years, Steinhorn says. So the buyer might have to update a bathroom featuring orange shag carpet, a wooden toilet seat and gold-foil wallpaper.

2. Skipping the home inspection
Clear your calendar and make time to tag along on your home inspection. "Most of what we do is education," says Kathleen Kuhn, president of New Jersey-based HouseMaster, one of the largest home-inspection franchisers in North America.

Melson wishes he'd been more aggressive in asking questions during his inspection. "This is the time where the house is open for all criticism and inquiries," he says. "Maybe I was a little young and anxious to be living on my own again. But if asking another five questions could have dropped the price of the home another $5,000, I would have asked about everything."

Ask for repair estimates when an inspector notes a problem, or do some research online later that night. "Every homeowner underestimates how much renovation costs," Kuhn says.

Next: Ignoring legal and insurance more