Buying a foreclosed property can be very attractive to would-be buyers due to the price, but purchasing foreclosed homes can be complicated and there are costly mistakes that can be made.
To avoid the risks associated with flipping a foreclosed house, you need to do some serious background research on the property and the neighborhood.
Real estate agents offer many tips to avoid making these costly mistakes. Some of those are described in this article.
1. Not Doing a Home Inspection
This is a very common mistake made by buyers. The problem with a foreclosed property is that it may have been abandoned by the homeowner and hence been in the market for a very long while.
Also, foreclosed homes are sold “as is”, meaning that there are no repairs made by the bank so buying a foreclosed property without thoroughly inspecting it is a big mistake. It’s best to hire professional home inspectors to make sure that there is no such damage that will impact your finances substantially such as water damage, electrical problems, renovations, and a lack of cleanliness etc.
2. Not Asking Enough Questions About the Property
Because a foreclosure is a legal process, it has legal implications for the future buyer as well. A title search is always necessary before a transaction. A title company or a legal advisor makes sure that the foreclosed property has no debts or taxes left which you will be responsible for once you purchase it.A title search is especially important if you are buying a Real-estate owned (REO) property because of the unique transfer of ownership. The liens may not be told to you until closing time. So don’t forget to check the background of the foreclosed home you wish to purchase!
3. Only Thinking Short-Term
Foreclosures are a different sort of investment than other properties due to the risks associated with them. It is important to consider how a foreclosed home will fare in the market in the future. A foreclosed home could possibly reduce more in value with time so it’s best to consider buying a foreclosed property with a long-term perspective.
To avoid long-term financial repercussions, consider all the various scenarios you may find yourself in after buying this foreclosed property. If you don’t have the appropriate resources to make this purchase into a long-term investment then it’s better not to waste your time and money.
4. Purchasing By Yourself
This isn’t limited to buying a foreclosed property but applies to other purchases as well. Looking for a real estate agent who is well-versed in the complexities of the housing market is essential before purchasing a foreclosure.
These agents can help in the following areas: real estate and foreclosure laws, price negotiation, mortgage fraud, purchase agreements and real estate closings.
Even professionals might not be able to fully guide you in order to avoid financial loss so going in alone when buying a foreclosed property is an absolute no. It’s also best to consult a lawyer to avoid legal hurdles in the future.
5. Limiting Your Options
Don’t limit your options. It is true that foreclosed property might appear more attractive as it is cheaper than others but the complications associated with it are also higher.
So it’s better not to rule out the option of buying another property – such as a short sale – from the start.
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6. Not Knowing Your Stuff
This mistake is linked to the previous in that if you don’t consult a legal estate agent, you are likely to be clueless. However, it also involves using your own knowledge and being aware of your limitations. You need to know how much you can spend, which neighborhood you are buying a foreclosed property in and the foreclosure process in general.
Targeting a specific neighborhood will ensure you are not overwhelmed by numerous listings. Knowing the process allows you to be aware of the lingo and gives you more bargaining power when the time to purchase the property comes.
7. Not Targeting a Specific Foreclosed Home
Just as you should target a specific neighborhood to avoid being overwhelmed by choice, you should also target a specific foreclosed home. Having a set of requirements of the type of house you want is a good idea because it avoids confusion and saves time from the get-go.
8. Not Having the Required Finances
All foreclosure sellers require proof of finances before you make an offer. Getting pre-approved by a lender is then important, especially if the foreclosed property is good because then you will probably have many competitors. If you don’t have the finances required to purchase immediately, another buyer will be given preference.
TIP: If you’re looking to finance a home purchase at a foreclosure auction, then working with a hard money lender can often be a good solution.
9. Not Anticipating Closing Delays
If you don’t prepare for delays in actually acquiring the property then you are likely to be disappointed. The process of buying a foreclosed property may drag on for weeks, sometimes even months. Many agents specialized in selling foreclosures for banks may have loads of properties to sell off so it may be long before you actually get a hold of your purchase. If you are looking to invest in a property which you immediately want then a foreclosure may not be the one for you.
10. Spending More Than Planned
It’s important to set a maximum price you are willing to purchase your foreclosed property for, in order to avoid financial loss. This is because with repairs and other spending, there will be a significant amount being spent on the property. So don’t make the mistake of blindly spending on the property because that is a terrible investment.
11. Not Knowing How to Deal With the Bank
When buying a foreclosed property, many buyers assume that banks will give them a huge discount or simply give them half off the purchase price and end up making very low offers. This is a huge mistake that needs to be avoided. Banks are not institutions made for home-selling so they usually hire professionals to do the job.
These professionals are looking to make sure the bank continues to give them business so they look for a good price at which to sell the foreclosed home. They also receive bulk offers so it’s important to present a good offer verbally as well as in writing to the listing agent to avoid being sidelined.
12. Relying on a Quick Sale
Although house flipping is a good investment strategy, relying on it alone can be foolish. When buying a foreclosed property, some investors have the sole intention of selling it as soon as the price increases. Waiting till the market improves can be a long process and always expecting a profit is not a very great expectation, either.
13. Not Checking the Price of Nearby Properties
Being aware of other similar properties is essential in order to make the right decision regarding your purchase. Real estate agents refer to comparable sales as “comps”. Knowing the prices of nearby properties allows you to make an informed decision and not end up buying a property for more than its value.
14. Not Being Careful at Sheriff Sales
A sheriff’s sale auction is where foreclosed homes are sold to the public after a court order. At sheriff’s sales you have to do your research and be very cautious, making the right bid at the right time. If you end up doing this, you are likely to make a great profit while avoiding many of the complications that come with buying a foreclosed property.
15. Not Checking on the Neighborhood
Apart from the obvious reason of checking on the neighborhood – to be if it is safe, there are other reasons to check up on the neighborhood before buying a foreclosed property there.
For example, if the cost of the houses there has declined then purchasing property in that neighborhood would be a bad idea because selling it off later would be difficult. So a smart move is to look for a neighborhood where prices of homes are on the rise to avoid future financial loss and perhaps even get a greater return from your initial investment.
It’s true that you might get a good deal with foreclosed homes and buying a foreclosed property can also help save the neighborhood. It is thus a rewarding but risky investment overall but if you are able to avoid making any or most of the mistakes mentioned above, you are good to go!
Learn more about whether to buy short sale homes versus foreclosures >
Foreclosures are tricky processes and it’s best to know more about them. You can read up more here:
If you want to know more about the mistakes to avoid when buying foreclosures, read this:
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