With a glut of foreclosures coming to market, many rank-and-file homebuyers are discovering the financial benefits of purchasing distressed properties. For various reasons, foreclosed homes typically sell for just a fraction of the cost of non-distressed properties. While many are in poor shape, others demand just a few basic repairs. To avoid committing to a project that you can't afford, keep these things in mind during the search process.
1. Auctions: Proceed with Caution
While seasoned real estate developers and investment pros frequent foreclosure auctions that purport to offer below-market deals on high-quality properties, this isn't regular homebuyers should proceed with caution when it comes to the auction. Foreclosure auctions are fraught with financial pitfalls. Since bidders generally aren't permitted to inspect auction-ready properties from the inside, they're often blindsided with expensive repair projects. Worse, bidders have no way of knowing whether auction-ready homes are saddled with liens that can cost thousands of dollars to settle. While auctions have been known to create bargain-buying opportunities for persistent and knowledgeable buyers, they offer no guarantee of success.
2. Appearances Can Be Deceiving
It's never a good idea to take a house at face value. Real estate experts encourage all homebuyers to commission a home inspection before making any financial commitments. If you're in the market for a foreclosed home, this is absolutely mandatory. While virtually all foreclosed homes require some repairs or updates, the conditions of the homes can vary wildly. Fortunately, a $400 home inspection is usually sufficient to uncover dangerous structural problems, potentially expensive code violations and other serious issues. In the space of an afternoon, your inspector will let you know whether your new property is likely to be a sound investment or a nightmarish money pit.
3. Deal Cautiously with Delinquent Occupants
Be cautious when approaching delinquent owners and offering them cash payments to abandon their homes and avoid eviction. While they may accept, there's no guarantee that they'll leave in good faith. In fact, delinquent homeowners sometimes trash their former homes as a final gesture of defiance. Needless to say, this can create an unforeseen headache and add thousands of dollars to your renovation budget. Additionally, be sure to prevent nasty run-ins with previous occupants by changing all of the home's locks after moving in.
Instead of dealing directly with delinquent homeowners, another option is to hunt for bank-owned properties that haven't yet hit the auction block. Step five describes a sensible "bank-owned strategy" in greater detail.
4. Secure Pre-Qualification
For the more risk-averse buyer, it's best to buy foreclosed properties directly from a bank, mortgage lender or housing authority. Before doing so, secure "pre-approval" for any loans that you might need to facilitate the purchase process. This can be done through traditional mortgage lenders or foreclosure specialists that offer shorter-term financing vehicles. Getting pre-approved for your loan can give you the edge over buyers who haven't prepared in this manner.
5. Lose the Herd Mentality
The pitfalls associated with coercing an existing occupant to leave or hanging around a foreclosure auction in the hopes of striking it rich might be obvious, but that doesn't mean that there's a "correct" way to purchase a foreclosed home. Most experts recommend taking a hybrid approach to the process. First, trawl desirable neighborhoods — both online using websites like RealtyTrac and in-person if possible — in search of foreclosure activity. Ideally, look for houses that appear to be in foreclosure but haven't yet been listed as such. Once you find a suitable property, approach the lender or housing authority that owns it and express interest in buying it outright. Although you may be required to make a good-faith deposit, chances are good that the managing party will agree to bypass the auction process and work directly with you.
A foreclosed home is a potentially lucrative investment, but the process of purchasing one can be daunting and complex. With these commonsense tips in mind, you'll be better prepared to handle unexpected complications and ensure that your investment pays off in a big way.
Paul Cones is the president of CourthouseDirect.com, which provides sales comparable reports that detail property sales containing similar characteristics, including addresses, sale amounts and transfer dates.