A few years back I coined the term "Foreclosure Lightning". It refers to an "accidental fire" that involves a property in foreclosure. Obviously accidents happen. It is important to note that properties with loans on them should always have fire insurance. In fact lenders do use force-placed insurance to protect the security for their loans in the event that a borrower has not kept insurance current.
If you discover a situation where a foreclosure property is damaged by fire, you can do your research and see if the fire occurred while an insurance policy was in effect, and if there were any circumstances related to the fire (from the Fire Department report) which would void the insurance. If there are any factors that would indicate that the insurance had lapsed or could not be applied in the situation, then we would know that we were buying either a partial or total teardown and the cost of repair was up to us alone and make our bid determination accordingly.
In contrast, you could find out that there was insurance at the time of the fire and that the insurance was unable to affect repairs after the fire due to an inability to get the borrower to take responsible actions that would facilitate a repair. You can lead a horse to water, but you can't always make them drink. Kurt bought a multi-family a few years ago in Fresno by buying the defaulted note and holding an auction as the lender. At the auction there were no other bidders so he won the auction and became the owner of the property as an REO.
More importantly, he got a deal on the note because one of the units had unrepaired fire damage. Upon researching the fire event he discovered that insurance had been in effect and that the insurer had issued a check for the claim. The property owner did not take steps to repair the fire damage. As the new lender, Kurt contacted the insurer and got a new check issued directly to the contractor whose estimate had substantiated the filing of the claim. He was thus able to get a deal on the note, get a deal on the property as a direct result, and get a completely remodeled unit as icing on the cake.
This being said, I wanted to point out a recent deal at the auction that someone got on a fire-damaged 4-Plex. The property is on Long Beach Blvd in Lynwood. The sale was on June 3rd, 2016. The place looks pretty bad. It would be hard to imagine this was accidental, so I would assume that the new owner would wind up having to fund all the repairs. That would justify the fact that the new owner, who bid at auction paid just $107,680.01. I looked on Zillow and sure enough the property is described as a tear-down. The new owner did their research and knew exactly what they were getting. The property will be rebuilt and they will soon be pulling in rents on the newest 4-plex on the block. If the new owner is a contractor, that would be the perfect storm. They could pay themselves to build the new units and have a nice tax haven for some time. Who says lightning never strikes twice?