For reasons associated with cost, return, and liability, most bank servicers do not want to perform repairs to a REO property. Therefore, most REO are marketed sold as-is. In just a few cases, such as Fannie Mae in some markets who is rehabbing to bring foreclosed homes to owner-occupant buyers, it is up to the buyer to assess what will need to be done to make a home marketable, and the cost to do so. When a property is marketed "as-is" what can a potential buyer expect? In most cases, not much. Buying a home marketed as-is requires the knowledge and skills to assess all parts of the property to assess cost and risk. It is not a game for the inexperienced, or long distance investor. Most REO homes require a hands-on buyer for just this reason.
Lets start with a list of what a bank WILL do. The good news, I have never seen a bank that would try to sell any home with a trash mound like the one in this picture (taken at an actual Wilmoth REO property). Banks will perform trash outs. They will try to offer personal property back to the former owners within the requirements of the local legal system. The bank will usually do what is necessary to stop a problem that risks causing further damage and loss of value to a property. The bank will maintain the exterior to a minimum standard required by the local community (lawn, windows, access). Security of the property will also be provided to the extent the location dictates (steel shutters, boarded windows and doors, deadbolt locksets, etc).
In the category of issues MAYBE the bank will deal with- we have mold. Water intrusion and the resulting damage is usually tackled by stopping the water damage and then assessing the risk to humans of entering the property. Lesser amounts of mold are usually left to a new owner to remove. More serious cases of mold are reviewed and a decision is made whether to market the home utilizing a mold waiver for all parties to execute prior to entering the home, or for the bank to tackle the mitigation process. In general, this decision rests often with the marketing plan and the expected final buyer (occupant or investor). The process of mitigating mold could open the bank to liabilities they do not care to assume. It also usually requires such extensive repairs as part of the process, it likely means a full rehab project for the parts of the home involved.
In the last ten years a new problem has been found increasingly in homes, particularly in more rural areas. Methamphetamine labs are commonly using a residential home as a cover for their operation. Upon finding a home that was used for the production of meth, the REO broker needs to take precautions and not inhale the air, but obtain a full set of photos. Remediation will usually become the responsbility of the owner (via foreclosure). This is a very expensive project as it commonly affects all parts of the property. Toxins may have saturated the home structure so severely that demolition is the final outcome. I have never seen a home utilized as a meth lab sold on an "as-is: basis.
Another issue are "grow houses" which basically are homes converted to the full time germination and harvesting of marijuana plants. Other than a persistant odor that must be removed, this is not as serious of a cost to repair. Banks will generally remove all carpet and provide fresh paint and a good sterile cleaning.
A new issue being found in the southeast US is the construction of homes around 3-4 years ago with defective Chinese drywall. Unfortunately, there is not a standard available for determining if this drywall is emitting a hazardous toxin in the air, or just an unpleasant odor. Either way, having visited several of these homes, the effect of this drywall makes it unreasonable to expect an occupant to reside with the odor. There is also corrosion to brass fixtures and hardware. At this time, most banks seem to be taking these properties off the market to determine a strategy for their liquidation. Assuming no hazards are found in the drywall material, I expect that banks will sell these properties as-is to investors who will strip the home of all the drywall and refinish the interior. Obviously this will cost the banks in the form of huge losses on each property. The decisions being considered today will likely involve the fact so little is known about this issue that holding the properties until it is all sorted out is also very costly.
There are many issues facing homes that develop due to simple lack of maintenance. In general, these issues will be part of the purchase price when a REO property is sold. There are exceptions and I have tried to identify some of the more significant ones. Each situation is unique and I would never proclaim this is a comprehensive list. Time will add new issues..just as a year ago we were just starting to learn about chinese drywall.