Zombie Foreclosures: The Risks and Rewards of Buying Vacant Homes

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No matter how long you’ve been in real estate, there are always some surprises waiting for you. Even if you have years of experience, you will never see it all. 

Even now, I have deals where something comes up that I’ve never encountered and I have to navigate those new obstacles or situations, adding it to the experience bank for the next time. In the 14 years that I’ve been in real estate, both as a licensed agent and an investor, I’ve seen things, man, including hordes of zombies. 

Yes, I said the Z word. I’ve worked on hundreds of REOs (bank-owned foreclosures) and short sales, and the majority of them have been vacant. It just comes with the territory when dealing with foreclosures and pre-foreclosures. So what are the risks and benefits of working with vacant properties? Why am I talking about zombies, and what does it have to do with real estate?  

Being a fan of zombie movies, I’ll start with the walking dead, then we can get into numbers forecasted for foreclosures and vacant properties for the rest of this year and 2021. And, of course, the pros and cons of working with vacant properties.

The zombie invasion

Around 2008, some new real estate terms started getting thrown around that did more to confuse the average American than anything else: zombie foreclosures, zombie homes, and zombified houses. Working with these types of homes on a daily basis during that time, we never called them that, but the media sure did enjoy mixing shambling horror monsters in with the housing crisis. 

In short, a zombie foreclosure is a home that is vacant during the pre-foreclosure process and remains vacant through foreclosure auction. The homeowner abandoned the property, likely incorrectly believing they had to immediately move out after receiving a foreclosure notice, thinking the foreclosing lender is now responsible for the property. This could result in the property being vacant for four months at best (time from foreclosure notice to auction) and years at worst. Since nobody is occupying or caring for the property, the home falls into disrepair, bringing down neighborhood values and creating safety concerns. 

According to ATTOM Data Solutions’ latest report, there are 200,065 properties that are in the process of foreclosure as of October 29, 2020. Out of those properties, right now there are only 7,612 that are zombified, which is up slightly from 3.7% to 3.8% since the third quarter. However, foreclosures decreased 7.3% between the third and fourth quarter of 2020.  

Wait, aren’t we in the middle of a pandemic with 7% unemployment? Well, yes, but we also have the CARES Act passed earlier this year, which is a way the federal government is trying to shield the housing market from the economic downfall due to the COVID-19 pandemic. The CARES Act puts a moratorium on lenders’ ability to foreclose on government-backed mortgages, which affects 70% of home loans in the United States. If there is no further action by the government, the ban expires on December 31. 

The relief act also allows for some homeowners to pause mortgage payments or put off payments until the end of the loan. Of course, on January 1, 2021, when the foreclosure moratorium is lifted, this could cause an immediate spike in foreclosure actions. 

“A surprisingly strong housing market and a temporary ban on foreclosures continues to leave most neighborhoods without a single [zombie foreclosure],” said Todd Teta, chief product officer with ATTOM Data Solutions, in the report. “All that could change in a flash when foreclosures are allowed to resume or if the coronavirus takes a toll on the market.”  

While the zombies are spreading all across the U.S., according to the ATTOM report, the Northeast and Midwest have the highest number of our undead friends. These states have also been hit hardest by the first wave of the COVID-19 pandemic: “New York continues to have the highest actual number of zombie properties (2,131), followed by Florida (1,027), Illinois (934), Ohio (836), and New Jersey (346). California leads in the West, with 234.” Expect the numbers to change after the next few months of the second wave as it hits other states as well.

The pros and cons of working with vacant properties

When working on an REO team, there was always a mix of relief and dread when we found a newly assigned property that was left vacant. It saves some work on one side, while potentially opening a Pandora’s box of issues on the other end. You might feel this way, too—no matter whether you are buying a pre-foreclosure or auction property that has been left vacant. 

Legally and procedurally we would have to watch the property for a week or so, doing multiple occupancy checks to try and get hold of anyone who might be living at the property. Sometimes it was obvious that the now-empty property had nobody living there; other times the property was full of furniture and personal items. If there was enough property left, we would have to get the sheriff involved and do a personal property eviction. Once we got into the property, we could really see what was in store for us.

Con: Property damage

Something magical about vacant properties is the acceleration of decay that seems to outpace time itself. We have encountered hoarder houses, meth houses, flooded houses, frozen houses, and half-burned-down houses, along with gutted kitchens/bathrooms, dead animals, concrete in the drains, black mold, and caved-in roofs. The most common damage we encounter is due to the property not being winterized, since the departing homeowner rarely winterizes the home. Many times, it was the homeowner who caused the damage, taking their frustration with the house out on the house.

Con: No disclosure

Buyer beware. Unlike a normal real estate transaction, it’s very rare that you will actually get any disclosures signed by the absentee owners. No matter how much you tell the previous owner that it’s their legal duty to disclose any defects they know about, many times you just can’t convince them. You may never even talk to the previous owner; you might be dealing with their heirs or the asset manager at the bank. Both of whom have never lived at the property and know nothing about it.

Con: Security concerns

It can be a fun surprise to find that someone has taken up residence in the property without anybody’s permission, forcing you to call the police or take legal action for eviction. An abandoned property seems to shout its existence to every person wanting to cause mischief and every kid who likes to throw rocks in a five-mile radius. Boarding up broken windows or doors, rekeying locks, and setting up security systems are the first three things we do at a new vacant property to ensure that no further damage can be done. Until you can fix up the property so it blends in with the neighborhood, just accept that it will be a constant target and budget for that.

Pro: Potential discounts 

With a vacant property typically come deferred maintenance, outright damage, extenuating circumstances with the owner or heirs, or just an indifferent asset manager. Taking stock of the defects of the property and negotiating with the seller can be much easier when the property is vacant and nobody is living at the home. You might be telling them about repairs that they didn’t even know they needed. Pictures, bids, and extra details go a long way toward helping you negotiate a discount on your zombie purchase.

Pro: No evictions

Unless there are squatters in the property, a major upside is that there is nobody to evict. No owners or former renters to negotiate cash for keys with, and no further damage to the property (intentional or not) when the occupants move out. This can save you thousands of dollars up front by not having to pay legal fees or money to leave the house clean. It also saves you time, as eviction and even cash for keys can take two to six weeks. 

Pro: Better visibility

This can be a mixed bag, since only about half of vacant properties I’ve encountered have been empty or mostly empty. But in those cases, boy was I glad they were. I’ve found all kinds of issues that would normally be hidden behind furniture, under rugs, or behind boxes in the basement or garage. Structural issues, water leaks, and concrete damage are just a few of the things I’ve only found because the property was completely empty before I bought it. I’d much rather find out before buying than after—I’ve done both, believe me.

Looking ahead

Another ATTOM Data Solutions report predicts that foreclosure numbers could double from the current 200,000 or so by mid-2021. This should cause the zombie properties to also go up; it wouldn’t surprise me if this number also doubled, leaving us with nearly 15,000 properties vacant before the foreclosure auction. 

While this isn’t much compared to the projected foreclosure data, it certainly is an opportunity for agents and investors to get in front of these properties and homeowners who mistakenly think the bank “owns” their property just because they are going through the foreclosure process. The CARES Act could also get extended, or other legislation passed that would help homeowners who are still being impacted by COVID-19.

Just keep in mind that these zombie properties have risks and rewards, and may not be suited for all investors. Go into each project mindfully—and be prepared for surprises. And perhaps you’ll get the best surprise of all: a massively successful renovation project. 

Do you invest in “zombie foreclosures”? Why or why not?

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.