Problems with Foreclosures

With foreclosures on homes at an all time high, many homebuyers and real estate investors are looking to get in on the market in foreclosed properties. While there is real opportunity to get a home at a great price, and to make a profit, buying foreclosures offers a unique set of challenges. Many ads would have the public believe that property is everywhere and that it can be bought for almost nothing, even with bad or no credit. It is possible to get a good deal, but there is no such thing as easy money. Being successful in any real estate market requires planning, diligence, patience and just plain hard work. The more knowledgeable you are about the foreclosed property market, the more you can plan to minimize the potential risks and problems that can come with foreclosure purchases.

The reason that investment in foreclosed properties is so popular is that they can often be bought at a lower price than conventional homes. Because the very nature of foreclosure dictates that either the bank or the homeowner wants and needs to get rid of the property makes it a buyers market. However, it is important to realize that there is no guarantee that you will make a profit. The housing market, as a general rule, does see a steady increase in value over time, which means that there is potential for profit. But a ‘shotgun’ approach, in which a person simply purchases the cheapest homes available, is not a smart strategy.

Being successful in flipping foreclosed properties requires a good deal of homework. In order to turn a profit, you must look at homes that are in areas that are on the way up. You can do research on demographic trends, crime rates, etc. but many of the clues will be obvious to you if you simply study the neighborhood. How do things look? Are there new developments being built? Is the area becoming isolated, or is it getting drawn into the center of things? Are there too many foreclosures– people trying to get out? Is the city investing in the area? These are just some of the indicators to look for. If an area is getting better, in the process of revitalization, then you are far more likely to profit from a future sale. If, however, the neighborhood appears to be in decline, logic dictates that the price of the property will not go up in the near future.

It is also important to realize that property investment in general is not a quick return proposition. In a depressed economy, housing prices will (and do) drop. This is not a problem if you regard it just as investors do the stock market, buy low and sell high. It does mean, however, that you have to wait for the ‘high’. If you must have access to the money that you invest, and you are expecting a relatively quick profit, then investing in real estate is not for you. If you have the patience and the means to let some property sit, either empty or as a rental, then you do stand to make a good profit in the future. You may also consider investing in upgrades that will pay off when you sell.

There are several different ways to purchase foreclosed homes, including a pre-foreclosure sale, auction sale or bank sale. Each of these has unique challenges, advantages and disadvantages. The more you understand about the foreclosure process and the different means of obtaining foreclosures, the better the chance that you will come out ahead on the deal.

Buying a home at auction is likely to net you the best (lowest) price, but this also comes with a high degree of risk. If a bank has foreclosed, it will offer the home for auction with a low starting bid. The disadvantage to this method is that you must pay for the house on the spot or put down a hefty deposit, and at this time, you may have very limited information about the condition of the property. Additionally, auctioned homes are generally sold ‘as is’ with no warranty period. Ask if the house has been professionally inspected in the past few years, and look at the report. If at all possible, arrange to have an inspection completed prior to the auction. It is well worth the small monetary investment.

If you are uncomfortable purchasing at auction because of possible problems, you can instead buy a home from the bank or from the original homeowner. This type of sale is generally referred to as a pre-foreclosure sale. In both cases, you’ll be able to negotiate a reasonable price, while minimizing your risk.

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