Due Diligence When Buying a Foreclosure in NYC

Buying a foreclosure is by nature a risky business, and it’s easy for any buyer to end up over-paying for a property that is nothing like what they expected. The lack of information regarding the state of the property at the time of the auction can turn what seemed like a bargain into a money pit. Therefore, it’s essential to do in-depth research before the bidding starts, and we’re here to show you the tools of the trade.

Once you become familiar with the entire foreclosure process in New York, the next step is finding and researching individual distressed properties with potential. In a previous post, we covered ways to find foreclosures that fulfill specific needs by using various filters, from building type to characteristics, location and lien amount, and more.

In this article, we’ll go into specifics on what you’ll need to look for in a property report so that by the time you get to the auction, you’ll be adequately enough informed to make a solid decision—specifically, whether to buy and for how much.

Here are some of the essentials you’ll need to look at when researching a foreclosure:

the lien on the property and title documents, showing ownership and mortgage(s), giving you crucial information about the main mortgage lien, the creditor and the former owner, as well as copies of the official documents
running a comparables search—this should give you a pretty good idea of how much the property is worth by comparing it to similar ones in the area
analyzing property characteristics, zoning and local facilities, violations and hazards—a good online building and surrounding area inspection can go a long way in informing you whether this property would be right for you and your potential tenants or clients.

Remember that the highest risk in a foreclosure comes from the lack of access to visit and inspect the property right before the auction. The only way to completely mitigate this risk is to contact and strike a deal with the owner to let you see the building. However, make sure your approach is a delicate one—owners going through a foreclosure may be highly frustrated and unwilling to cooperate with anyone involved in the process.

Here’s how PropertyShark can help you with your research:

After you lock in a foreclosure on the NYC Foreclosure page, click on it to access the full property report.

1. Find out the mortgage amount and other liens on a foreclosed property

Probably the first and most important thing to check when looking at a foreclosure is the full amount of the main mortgage lien: this will largely determine if the property is even worth looking at. The transfer of ownership in a foreclosure case is contingent on the full payment of the entire mortgage and penalty debt.

In some rare cases, there may be other outstanding liens—either a second mortgage, or a construction or tax lien. These will create additional costs of which you should be well aware in advance.

To find out about all of these and avoid unpleasant surprises, go to the Owner Tab on the property report, and have a look at the Liens section. You can see the outstanding value of the mortgage (i.e. what minimum amount the bank is looking to cover in the auction), as well as other types of liens on the property that may still be due (you will need to check whether they have been paid or not). If you become the owner of the foreclosed property, you will be required to cover all outstanding debts.

All title documents issued on the property (going back to 1966) can be found in the Title Documents section, whether they are deeds, mortgages, satisfaction of mortgages, or something else. Click the blue doc icon on the right to see a copy of the original document from the Department of Finance.

2. How much is the property worth?

The other essential question every investor and homebuyer has regarding a foreclosure is the price: is it below or over its market value. The auction price has to be significantly lower than its market value to offset the potential cost of repairs and renovations needed to bring it up to the desired standard.

The most flexible and comprehensive way to research the market value of your potential new property is by running a comparable sales search. Looking at similar properties (in terms of total square footage, number of rooms, type of building etc.) that were sold in the proximity in the last few months is one of the best ways to assess how much the property you’re looking at would be worth on the market.

For example, if you are looking to find the value of a foreclosed condo unit, start by searching for other units in the building sold within the last 3-6 months, that are about the same size (± 10%) and have the same number of rooms and bathrooms, and then extend your search to a half-mile radius around the building to have more condos that you can compare ‘yours’ to.

You can access the comparables tool directly from the property report or start a fresh search from the comps page.

Our Comps tool comes with its own set of options and features where you have the possibility to fine-tune your search until you get the most relevant result. You can find out more about how to use the tool and evaluate the price of a property in this article.

If you do not wish to run comps, there is some information in the Comps Stats & Trends section in the Appraiser tab that can give you some estimates. The values are the result of an automated comparables search (default criteria, based on the property’s characteristics).

Another element to take into consideration when looking at estimating the future value of your desired property is to look at the density of foreclosures in the area. A high density means you might encounter difficulties re-selling it even years down the road since most homeowners and retailers flee from troubled areas with a lot of boarded-up construction.

To check this, go to the Foreclosure Auctions tab on the Foreclosures page and click any of the borough-titled links at the bottom of the search menu. You will be able to see a map pointing out all active foreclosures in the borough and zoom in on the area around your target property.

3. Get to know the property

Opening a report, you will first notice the Overview section in the General tab, where you can find one or several photos of the property and property characteristics, including lot size and usable square footage, the number of stories, year built and building class.

If you wish to get in touch with the owner for a visit to the property, you can also find detailed ownership information, including phone numbers and e-mail addresses in the Owner tab.

Even if you do manage to get an inspection of the building, it’s still a good idea to study the paper trail of the home and other construction details that may not be available on site. To cover all the bases, make sure you don’t skip the following sections:

As an investor, you will want to know about zoning, available FAR and air rights, either for development/re-development or to mine for marketable unused square feet. All this info is available in the Dev tab
Open the Neighborhood tab to research local facilities, schools, public transport, available retail and neighbors in the area are without leaving your chair
the Permits tab will give you details about construction and improvement work done on the property/unit
Violations tab: when you can’t get an inspector through the door (and, with foreclosures, most times you can’t), this is the best alternative way to learn about medium and severe damage to the property that could make the place uninhabitable and thus compromise a re-sell. You can also check the status of a violation in on the right side of the HPD Violations column. Toxic sites, flood risk and hurricane evacuation zones are also available in this tab, so whether you end up living in the newly acquired property, renting or re-selling, or if you plan on managing a commercial space – know the risks and work out a mitigation strategy

If you can, check out the property on site, but having done your homework right using the resources detailed above, your chances of making a sound investment increase greatly.

While the information provided through the PropertyShark database reflects all updates published by governmental agencies, we recommend non-professionals seek expert advice in undertaking a due diligence investigation.

The Foreclosure listings tool mentioned at the beginning is available to subscribers holding an Elite or Platinum subscription. All other users will have significantly restricted access to auction data and the features of this tool. Our comprehensive Property Reports, however, are available with the Pro membership, with the exception of liens information (also requires an Elite or Platinum subscription).

If you have any questions about using our tools, our Customer Support team is available to assist you with any inquiries, 7 days a week from 9 am to 5 pm ET at 718-715-1758 or [email protected]