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The Pitfalls of Buying a Foreclosure Property

In today’s economy,  buying a foreclosure property may seem like a great deal. Everyone has seen the TV shows and infomercials that make the process seem so simple—pick a house, pay a fraction of what it was once worth, fix it up,  and then move in. Or, choose to sell it and collect a huge profit.

Unfortunately, things rarely go so smoothly.

Foreclosure properties are real estate that the owner failed to make payments on.  The owner was then unable to or refused to sell it, so the bank reclaimed it to try and salvage its investment.  In short, it’s a property that neither the bank or the original owner could sell. And while it might need some work now, it was probably in good condition when the owner was in residence,  and there were still no buyers for it!

So why do people buy foreclosure properties? Usually it’s for one of two reasons:  They want an investment property to repair and sell for a profit, or they need a cheap place to live and can only afford this kind of housing. However, there are problems with each approach. Some might be glaringly obvious, but some may be hidden. If you are considering buying one of these foreclosures, you should consider a few key points before doing so.

• A real estate investor has already rejected it. That’s right. A professional  looked it over and passed. It could be too damaged, expensive, in an undesirable location, or a combination. If a person who has built their career on choosing good real estate isn’t interested, you probably shouldn’t be either.

• Foreclosures are sold “as is”. Basically it’s buyer beware with these homes. Typically, these homes have been empty and deteriorating  for a while. It’s also common for the previous owners to destroy or damage parts of the property in some way in retaliation for losing the property and being evicted. Wiring, plumbing, and appliances have all been sabotaged in previous instances.  The bank doesn’t care what condition the home is in, it just wants to unload a liability. Expect to pay for a thorough inspection and at least some repairs.

• The house may not be such a great deal. The bank still wants to recoup as much of its loss as possible.  Initially, foreclosures tend to be listed for more than they’re worth. You may want to wait and see if the price drops later on before jumping at the listing. Also, be sure to do a market analysis of the area to compare. In addition, a major point to consider is how much it will cost to fix up the property. Repairs alone can add thousands of dollars on to your investment, let alone any remodeling you may wish to do. Get an estimate from a contractor before buying, and add it in to the listing price, along with the closing costs.

• There are many wonderful homes for sale that aren’t foreclosures. This is the most significant point—currently in this market, there are lots of properties listed for great prices, in good locations, and move-in ready.  And, the owners  are often more motivated to get the sale through than banks, who often require extra steps and red tape in addition to being clogged with other foreclosure sales.

If you are willing to make the financial risk and have both the patience and knowledge, then a foreclosure can indeed be a good deal. But if you aren’t an experienced homebuyer, then why take the chance?

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