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Bank owned properties with Environmental Issues

Dec 1, 2022 11:02:00 AM / by David C Sulock

Bank-owned properties with Environmental Issues.

Curren started dealing with Bank owned properties both residential and commercial starting in the 1990s.  Aside from the fact that buying a bank-owned property means you are buying a property that the owner will make no representations on, you are also likely buying a property with an environmental issue.  So due diligence is of paramount importance to protect your best interest.    For commercial sites a Phase I is mandatory and expect a Phase II.   For residential aside from a typical home inspection, you will need to pull the trigger on a tank sweep and mold inspection (be sure to get air sampling with the mold inspection).

Bank owned properties with Environmental Issues

Be double concerned if the bank-owned property was flipped.  

Flippers don’t do due diligence generally, so they are out looking for problems.  What issues have we seen with buying a flipped home $10,000 to $210,000 of Environmental remediation?  These costs relate to unhealthy levels of EDA leaching from the water pine, leaking oil tanks, hidden structural issues, and of course mold.

Oil tanks at bank owned properties

Pro Tip - We find mold issues in approximately 80% of former bank-owned sites.  The #1 reason is that the home was vacant and stuff happens when no one is home, like uncontrolled humidity and of course water leaks and rain entry into the structure that gets confidently covered over by the flipper.

Don’t Blame the Bank for Environmental Issues.

Unfortunately for both banks and borrowers, many mortgages fall into foreclosure with the bank taking title to the property.  Banks want to loan money not foreclose and clearly, people that obtain a mortgage do so with the intention of enjoying homeownership. Environmental contamination at bank owned properties

But economic hardships happen,  in the 2007 recession thousands of homes had mortgages that were more than the property was worth, triggering a wave of foreclosures.  Mostly

this wave has subsided, although we work with banks and government agencies and are told that there will always be a large pool of properties where people default on the mortgage.   Talk to any experienced house flipper and they will tell you that bank-owned properties have always existed and represent a good investment for them.

The photo below, a restaurant that the bank owned.  The place sold and still smells of mold.

mold and foreclosed properties

The rub with bank-owned properties is that the bank must take the asset back because the mortgagor is not paying the mortgage.  So if the house has a leaking roof,  the bank has to manage it.  Can you say mold?  Obvious issues with the home have to be addressed so the home does not decrease in value and is also in a condition where the house can be sold.    Undisclosed oil tanks are not an issue on the banks' priority list.  In practice, most banks are not equipped to process a foreclosed property.  Remember banks lend money, yes they have people to manage foreclosed properties but that is not their primary business so do not expect them to excel at it.    Banks are also looking to minimize their losses as they are now forced with taking a property back, so corners get cut. 

Did you know most banks once they take a property back utilities are shut off? If the house has a sub pump and it rains, well water fills the basement and mold grows. 

Pro Tip - Environmental issues can drive a property into foreclosure because the costs of remediation and the amount owed on the mortgage can exceed the property value.

The reality is with an uncertain economy, homes fall into foreclosure, making the bank responsible for the upkeep and future sale of the asset. Many of these properties have active and often times inactive tanks, and failing infrastructure, if you let the property fall into the bank's hands you don’t have the funds to maintain the property.  

Regarding tanks, the homeowner may have converted to natural gas, leaving the tank in place as it was just another expense.  Fast forward to today, the home is being sold "as is", the bank represents that a tank is onsite, but that’s it.  No warranties regarding contamination are expressed or implied.  

Buyer comes along and tests the tank because they are savvy enough to know tanks can leak and tank leaks are expensive to clean up.  They do a boring and find oil and either want to back out of the deal or want to know the cost for cleanup so they can negotiate the sales, and lower the cost of the purchase.  The problem is all they know is the tank leaked, clearly if the tank didn’t leak no cleanup is required no further worry.  What they don’t realize is that a tank leak is a whole other issue and you have to go into an investigative or diagnostic phase to determine the extent of the contamination.  Budget $3,000.00 to $5,000.00 on average to define (delineate) the contamination so remedial costs can be developed.  Delineation is akin to an architect drafting plans to build a home or an addition.  The architect's plans allow the owner to split costs on construction as the plans define things like the size of the house, the number of bedrooms, bathrooms, and type of windows, in short, the details that make up the bigger picture.  A delineation says the contamination goes 16’ deep, groundwater is 14’ so you have a groundwater issue, contamination extends 2’ onto the neighbor's property, 6’ under the house, etc. get the picture?  

A tank test says hey there is an oil by the tank, a delineation says where the oil stopped flowing.  It gives you a 3D map you can follow to determine how much soil needs to be removed.

Now, what buyer is going to spend thousands of dollars to figure out remedial costs the bank may not even agree to since the sale is as is?  The answer is not many, people hope that the leak only costs 5k or $10,000.00, when in reality the cost could be $70,000 or $110,000.  You don’t know until you wrap your hands around the size.

Your best outcome is either to bite the bullet and do the delineation so you can actually have real costs to clean up or push the bank to delineate so you can negotiate a purchase price knowing the cleanup is only $42,000.00.   What bank is going to give a mortgage on a property that needs $42,000.00 worth of cleanup?

Now I just discussed neglect of the property during bank ownership.  How about intentional damage?   We see it, you can imagine losing a property is stressful.   Well, it can drive people to do destructive things. Think pulling out the cooper plumbing lines, cutting electrical wires, hammering holes in Sheetrock, and even dumping chemicals in the ground. Yea the last one is real we had a $800,000 property become bank owned, and the owner dumped oil, gas, and other compounds in the ground.  A neighbor told us he drained a boat into the ground and dumped oil out of lawn equipment on the ground.  You really can’t make this stuff up.

Environmental issues relating to real estate are complicated, you can trust issues want a firm with over 2 decades of experience.  Call Curren at 888-301-1050.


Environmental liability of bank owned properties


David C Sulock

Written by David C Sulock

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