Should I buy a foreclosure house if the bank refuses to turn on the utilities (electric, water, gas)?
Saturday, August 25, 2018
When the lending institution refuses to turn on the utilities for an inspection of a foreclosure property, the house is usually in poor condition and being sold as-is at an enticing, bargain-basement price. Because you can’t test the plumbing, HVAC, or electrical systems, the purchase of this type of house is a a calculated risk you are taking in order to get what appears to be a good deal.
Professional investors that buy, renovate, and then “flip” these houses regularly are good at evaluating what to expect and how to deal with a house in rough shape. But if you are a first-timer, here’s the two factors you need to consider:
- What is the condition of the structure, roof, and other components of the house that can be inspected? Separate your evaluation into two categories, the components that can be evaluated and the ones that can’t, then start with the easy part first. It’s important to itemize and assign a price estimate to each repair.
Also, allow for items that do no necessarily require repair but are outdated and need replacement for the house to be acceptable to a “retail” homebuyer. This category would include things like kitchen and bathroom cabinets and fixtures, plus windows and doors, that are in serviceable condition but unattractive.
- Does the price allow allow for what can reasonably be assumed as the worst case scenario for the plumbing, HVAC, and electrical system repairs? While your home inspector can’t test these systems, a visual inspection by a professional can uncover defects such as raccoon-damage to ducts in the attic or badly corroded piping, both which will definitely require repair.
Then you move on to the unquantifiable. While you may not know if the air conditioning system and water heater will function when the power is turned on, if they are past the end of an average lifespan (approximately 14 years for a water heater and 18 years for an air conditioning system) and appear in poor condition on visual inspection, they will likely require replacement and you should allow for it in your estimate.
We recommend doing a careful tally of all the necessary repairs that can be verified, adding an allowance for repairs or replacements that can’t be verified which is weighted based on the age and visual condition of the systems, plus something for the value of your personal labor, and then adding 20% for surprises (yes really, 20%). When this number is added to the sale price of the home, the total should be less than the value of the home after renovation—based on recent sales prices of comparable homes in the same neighborhood in good condition provided by your realtor—to give you a reasonable profit for your investment risk. If not, you should consider finding another house.
Also, see our blog posts What problems should I look for when buying a house that has been vacant or abandoned? and Should I buy a fixer-upper?
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To learn more strategies for getting the best possible home inspection, here’s a few of our other blog posts:
To read about issues related to homes of particular type or one built in a specific decade, visit one of these blog posts:
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