The Risks of Purchasing Abandoned Property

The Risk Of Purchasing Abandoned Property

Real estate investors are always on the lookout for new properties with the potential to generate high ROI, steady income from rentals, or profits from flipping houses. Abandoned houses often qualify as one of the best properties for investment as they are occupied at lower prices and can be sold or rented at much more profitable costs.

However, there are several risks and red flags related to buying vacant homes that you must be aware of. In this article, we will discuss all such risks along with the ways to deal with the challenges that come with abandoned properties.

Let’s get started.

Potential Advantages of Buying an Abandoned Home

Before we move ahead to the potential risks of abandoned properties, let us discuss some of the significant advantages of such properties.

1) Cheap Prices

Abandoned properties, even if they have some distant owner or not, are expected to be sold at lower prices than regular market values. Depending upon the time period for which the house was left deserted, many repairs may be necessary. This requirement makes a huge difference in the total value of the property.

2) Low Competition

Unlike regular properties that have numerous potential buyers, abandoned don’t face as much competition from other buyers. This is also because of the expenditure on repairs and renovation in such properties.

When you enter the abandoned house market, you will find that there is a sizable market to choose from. Statistics show that the number of abandoned houses in the US is growing considerably.

3) High ROIs

If the unoccupied property is in a good neighborhood, renovations can help the house reach its market value, if not surpass it. As a consequence, the real estate prices in the immediate neighborhood can also increase as the condition of the abandoned house has been improved. Therefore, if you invest in such properties, it can provide you with high returns on investment.

Risks of Buying Abandoned Property

Abandoned houses might have their share of pros that attract numerous real estate investors. However, they also have a few disadvantages. Here are some of the major risks and drawbacks of abandoned houses:

1) Difficulty in Owner Identification

First of all, determining if the property is actually abandoned can be a challenge. In most cases, the owners have either died, divorced, or left the city. This means that the property would have gone to another person or the lender. So, even if the home looks unoccupied, it is not necessary that it is fully abandoned.

In order to find the current owner, you have to go through a detailed title search, which means extra time and added expenses. Also, even if you find the owners, they can be difficult to contact.

2) Repair Costs

One of the biggest challenges with abandoned houses is the repair expenditure.

When you look for abandoned property, you should expect several issues related to the roof, plumbing, electrical, or HVAC systems. Other defects like infestations, foundation problems, and rot are also likely to be present. You can come across broken pipes, resulting in water damage, stolen copper wiring or soffit and fascia, mold, rodents, termites, other pests, and damaged appliances.

The worst part is all these issues may or may not be easy to detect and can cause expenditure in the short as well as long run.

Also, many unoccupied houses have been damaged due to vandalism, fire, leaks, and even squatters.

3) Contingencies

Whenever you are planning to buy an abandoned house, make sure you have a contingency fund in place, typically at around 10% of your overall project budget.

Furthermore, in many cases, a bank or municipality may have ownership because of the nonpayment of the loan or property taxes. In ordinary sales, the seller would provide for all the disclosures of the home. However, in abandoned or foreclosed properties, you have to pay for all the inspections.

4) Careful Planning of Budget and Time

Abandoned properties demand careful planning of your total budget. Even if you are repairing the home for renting it out or flipping it, you can come across some expensive surprises when the work actually begins. It can cause you a loss of time, effort, and money.

Unlike traditional property that you can rent or sell immediately, you might have to wait for the complete renovation and the right tenant or buyer before you can reap the benefits of the property investment.

5) Obtaining insurance may be challenging

Another problem with abandoned homes is that most insurance companies will not easily insure them without their agent thoroughly inspecting them. This is mainly because the insurance will require expensive repairs before issuing the policy. Also, if the agency issues a policy, the premium will be significantly higher than a regular property.

Furthermore, abandoned houses are likely to suffer vandalism, crime, fire, or other damage in the unoccupied period and such damage can go unchecked, resulting in greater loss.

How to Counter the Risks Related to Abandoned Houses

1) Ask for an expert opinion:  When you are looking for the total repair expenses, you must ask for an expert opinion. You should hire an expert such as a local real estate agent who can detect all the potential defects in the home.

2) Keep an emergency fund: When the repairing work starts in abandoned houses, they can come with sudden unexpected expenses that you might not have detected before. So, it is highly recommended that you keep a separate emergency fund for such expenses.

3) Make thorough inspections of the property: Whenever you come across a promising abandoned house, start with finding everything that you can about its condition. It may include the reason for which it was abandoned, what problems it faced during its lifetime, how were the previous owner and how many taxes, titles, etc are pending on it. It will help you in estimating the expenses as well as future returns on the property.

Final Words

From the factors mentioned above, it is clear that purchasing an abandoned property isn’t always as straightforward as buying a conventional house. There are so many things to watch and consider.

So, even if the list and return on investment in abandoned property can be attractive, if you are planning to buy such properties, you need to be cautious. You must be prepared for any surprise that you can find after buying.

Our best recommendation is that you take utmost care of every aspect of the house and inspect it thoroughly before making the deal.

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