Key Things to Consider When Buying Foreclosures

Here are some things to consider if you're thinking about purchasing a foreclosure.

Can Real Estate Agents Help Buyers Purchase Foreclosures?

Foreclosures = Risk

I get asked quite often if I "do" foreclosures. Of course! There's no law against getting consulting advice when buying an asset. My job, primarily, is to make sure that you understand the risks of the property you are buying - and foreclosures are all about risk. Quantifying and understanding that risk separates winners from losers.

Is Buying A Foreclosure a Great Way to Make Money?

Yes, and no. Foreclosure investing is not for the faint of heart, nor is it a good idea for people who are have limited access to cash, and its generally not a good idea for people who don't know which end of a hammer to use. It may be the best way, i.e., have the highest return, for a retail investor to make money, but it's not the easiest.

Should I Buy A Foreclosure to Live in To Save Money?

You can certainly try, but in my experience, most people don't "want" the foreclosures that are out there. Most foreclosures are not neighborhood homes in nice condition! They are usually next to highways with failed septic systems, busted pipes, or next to graveyards or commercial zoning. They usually have an issue that makes them a compromise to live in. Perhaps whatever drawback the house has is a non-issue for you, and that's fine, but you still want to make sure you don't get in over your head. You can save some money going this route, but you can also lose money by purchasing a foreclosure. There's no guarantees here.

Why Are Foreclosures Risky?

Well, most homes are in foreclosure for a reason, and that reason has precluded them from a traditional sale. Again, most foreclosures are not "nice houses".  They are often houses that have troubled locations and/or condition issues.  There are exceptions, to be sure, but homes that do not suffer from these items are usually sold very close to market value, negating your purpose: Making money.  If you buy a home in good condition at market value, you've limited your opportunity to improve it and make money.  So if the goal is to make money, you have to buy a home that has the "right kind" of issues, namely issues that can be fixed, and fix them. To do so requires cash. Some properties, in today's environment may have additional risk that involves the bank's ability to deliver Title.  If the bank hasn't foreclosed correctly, you may find that you have to give the property back.

Can I borrow money to renovate a Foreclosure?

That really depends on the house and your credit profile, but even if you CAN, it is generally a limited amount (10-45% of the purchase price).  Home fix ups for foreclosures, especially those sold at auction, can have problems that are much more expensive than that.  If you buy such a home, and run out of money fixing it  up, you'll be the one getting foreclosed on, and that, my friend, is not where we want to be. 203K's and HomePath Mortgages are both federally back programs that are available currently.

Buying a Foreclosure means risk and work, but what else?

It's time to separate the good opportunities from the bad ones. Let's face it, most homes, if priced at $1, are a good deal.  Most homes, priced at $2 Million, are not, so figuring out what your property is worth all fixed up is an important first step.  Many times, our goal here will be to flip the property, so understanding actual market value, not a theoretical value, is ENORMOUSLY important.  No surprise recommendation here, you should be working with someone who prices property for a living.  Then you need to figure out how much work it needs, in $$, and then figure out what profit you want, estimate you carrying costs, and after figuring that out, can now discuss a bid for the property that makes sense.

How much money can I make when buying and selling a foreclosure?

If you want a guarantee, buy a toaster!

It really depends on how well you do the first step, but done properly, you should be able to net 25-100K per home. Any more than that, and you'll lose the property to someone else. There are other factors too, the demand for these types of properties, etc.  Properties that are less risky, and easier to move, will generally not receive the hefty profit margins.  Of course, I've seen many, many people lose money by (most commonly) NOT understanding the property they were buying was risky.  Also, some folks over-upgrade, by putting nice things in the house that either won't enhance its value or won't increase it enough to justify the expense.

How Do I Know What Should Be Fixed Before Selling a Foreclosure?

Again, it really useful working with someone who can help you out.  Specific Realtors who are knowledgeable about this process (and less than 10% are) are your best source of information, as they are out in the market listing and selling these homes.  They typically are aware of what buyers will pay for, and what they will not.  Once you get the hang of it, you can probably do it on your own, but a knowledgeable partner can reduce your risk significantly, and probably help you increase profits.

Q: Are there other things I need to be aware of when buying a foreclosure?

Municipal liens, tenant situations, condo fees, and many other specialty items that may or may not apply in your case.  Not to mention, how the property is sold makes a big difference in negotiating strategy.

 

 

 

 

*All information is posted in good faith and is assumed to be reliable, but may rely on third party information sources.