Foreclosed or bank-owned properties represent a good value as they allow you to purchase a depressed asset. Unfortunately, bank-owned properties provide little owner knowledge of the property and may have restrictive time frames for due diligence. Many of these properties are purchased with little to zero professional due diligence for the buyer.
After purchase, a boomerang effect occurs where the buyer or flipper improves the property and lists it for sale at a premium price. Prospective buyers will conduct due diligence that the previous owner may have overlooked and may uncover issues that the owner was unaware of.
We have a small school that was closed after being foreclosed upon by the bank. The bank had no prior environmental knowledge of the property. The new buyer viewed the school as low risk from an environmental standpoint. They purchased the school with cash, thereby avoiding the need for a mortgage that would have required a Phase I Environmental Site Assessment. Now, the new owner wants to renovate the building and needs a bank loan to reimburse themselves for the purchase and to provide funds for the renovation.
However, the bank requires a Phase I assessment, which has identified multiple Recognized Environmental Conditions (RECs). RECs are issues or potential issues that need further investigation. The owner is frustrated because any testing could uncover problems for which they bear no responsibility, yet they would still have to bear the costs of addressing those issues.
The owner decides to list the property for sale instead and of course finds a buyer who also does a Phase I, which again finds RECs that require investigation.
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