How to Invest in Condemned Properties

How to Invest in Condemned Properties
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A house that has been condemned has been judged by a government entity as unfit for habitation. Although it may sound like the end of the line, not all condemned houses are torn down. Some get a new owner and new lease on life thanks to renovation. Since condemned properties often sell for little more than land value, it’s possible to use condemned house renovation and resale as a source of income. Like most other types of financial investments, there are both benefits and risks associated with buying condemned properties.

Why Property is Condemned

Having multiple code violations is the primary reason a house will be condemned. A local government agency will seal the house and post a sign that forbids anyone from living there. There are a few other reasons a property may be condemned.

  • Water, electricity and gas have been turned off.
  • The home has been unoccupied for 60 days or longer.
  • The home is extremely dilapidated or damaged.
  • There are safety hazards in or near the home. The property has been seized by the government under eminent domain. This is a law that allows local, state and federal government agencies to buy private property for fair market value in the name of the public good.

Many local governments allow owners to retain the title for their property when it’s condemned for code violations. The owner is given the opportunity to clean up and repair the property and then appeal to have the property inspected and declared fit for occupancy. If the repairs are not made within a specific period, the local government will seize the property.

Finding a List of Condemned Houses

A condemned house list provides the addresses of condemned properties within a specific area. It may also include the name of the owner or property taxpayer as well as the date of condemnation and the reasons the house was condemned. Prospective buyers can look at the exteriors of homes on the list but typically are not allowed inside. This is where real estate agents, appraisers and contractors have an advantage over less experienced buyers since they have a better understanding of structural issues.

Cities and counties that manage condemned properties make lists available to the general public, either free or for a small fee. The first place to check is with the local building department. Some jurisdictions provide a website that lists vacant and condemned properties. Many cities and counties also provide reverse searches so you can provide an address and find out if a property is condemned or about to be condemned.

Buying Condemned Properties

Purchasing a condemned property is very similar to buying any other piece of residential property. Buyers make offers through real estate agents. The process may be complicated if the property is owned by a bank or government agency. An experienced agent can explain condemned house rules and regulations and may be able to help find financing. If a condemned house is in foreclosure, you will probably have to wait until it has been foreclosed on before you can buy it. You may also have to pay outstanding property taxes.

When a home begins to receive code violations, the owner may be having financial issues. Besides being unable to maintain the home, it’s possible that the owner is behind on the mortgage payments or property taxes. Before finalizing the purchase of a condemned house, it’s important to do the research to find out about liens attached to the property’s title as well as code violations that still need to be fixed. Once you’ve purchased a condemned home, you will have a limited amount of time to make it habitable and gain a certificate of occupancy.

Financing a Condemned Property

It may not be possible to get a mortgage for a condemned house from a traditional lender. A knowledgeable real estate agent should be able to suggest private lenders who are willing to factor the cost of fixing code violations into the loan agreement. Look for a short-term loan if you plan to buy a condemned house to flip it.

Condemned vs. Vacant and Abandoned

In many areas, a home that is vacant or abandoned will be seized by the local government. These properties are treated similarly to condemned properties, although you may have to search on a separate list for them. According to the U.S. Department of Housing and Urban Development (HUD), houses are vacated and abandoned for a variety of reasons, including the foreclosure crisis and the decline of many cities.

Abandoned properties become a problem for communities when no one is performing basic maintenance, bringing down the value of nearby properties. If owners are unresponsive, local governments can take control and demolish or rehabilitate the abandoned properties. Properties can also be seized when the owner has stopped paying property taxes and doesn’t respond to the threat of tax lien. When owners walk away from houses, most local governments want to pass on ownership as quickly as possible.

Property Auctions

Some local governments use auctions for the sale of condemned and abandoned houses. According to HUD, these auctions favor investors and speculators. This is not necessarily a bad thing since many investors bring value to neighborhoods by improving condemned and abandoned properties. However, it’s important for less experienced buyers to understand auction rules.

Although houses usually sell for a discount during an auction, not all auction properties are a bargain. Understanding the local real estate market is important. Experienced house flippers and real estate investors have an edge in this regard. They also may have a better understanding of the risks in buying auction properties.

House auctions may be held in a location away from the property, such as a county office or hotel meeting room. They typically require cash payment on the same day as the auction and do not allow pre-sale inspections. An increasing number of local jurisdictions have started to hold their auctions online, including Miami and Palm Beach.

Flipping Condemned Houses

Reality shows on HGTV and other channels make house flipping look relatively easy and profitable. The hosts of these shows are experts with access to staffs of contractors and construction workers. It’s possible for less experienced buyers to successfully flip property, but it’s important to select the right property in a neighborhood where homes are selling.

The best houses for flipping have more than one bedroom since most potential buyers are looking for two or more bedrooms. Cosmetic repairs are the easiest and least expensive to deal with. Look for properties in areas with access to public transit and nearby parks and shopping. Beware of houses that need major renovations like a new foundation, new roof, new plumbing or a new electrical system.

Most flippers aim for a 10 to 30 percent return on their initial investment and rehab costs. For example, a house purchased for $90,000 that needs $60,000 in repairs, for a total investment of $150,000, should be priced at $165,000 to $200,000 for a worthwhile return. If other homes in the area aren’t selling for this much, then the flip may not work out.