Planning on investing in some deeply discounted property? Maybe you’re looking for a fixer-upper for your first family home? Talking to friends and family and surfing around the internet, you’ve been hearing a lot about buying foreclosure property. Is buying foreclosures as easy and fool-proof as it sounds?
Buying property on the courthouse steps, as this old fashioned term implies, is nothing new. And yes, there are real bargains to be had. But as a new investor or home buyer, there are some equally real pitfalls you should know about.
Why Foreclosures Happen
Very few people would make the choice to go into foreclosure of their own accord. The openings to purchase foreclosures come about because sellers stop making their payments and this often happens because of some radical life change. While the economy is largely considered to be back on track, the results of the last few year’s volatility has caused dramatic changes in the American way of life for some.
Unsuspecting employees get laid-off or fired while others quit their jobs. The seller may be unable to carry on working due to a medical problem or accident. Sometimes too much debt and growing bills become overwhelming or there is too much fighting with a co-owner or even a divorce. Time sensitive life events like being transferred out of state for work can cause a hurdle too big to overcome. Whatever the reason, something cataclysmic has occurred in the seller’s life and now the property is being offered to the highest bidder.
The most obvious problem is you will be buying a house sight unseen, “as is”. You’ll have no way of knowing what it’s going to cost to make the dwelling habitable. One of the characteristic problems with buying foreclosures is that home inspections generally don’t happen. Resentful occupants are inclined to remain in foreclosed properties right up to the last minute, and usually won’t allow inspections. Those same resentful occupants may “fight back” by destroying the inside of the house.
Buying foreclosures means that even after the property has become yours, the previous owners may refuse to leave. You may have to use legal action to have them evicted, and evictions can be costly and time consuming. Avoid this type of problem by only bidding on unoccupied property. Another alternative would be to have a strategy to offer the previous owners a cash incentive to vacate.
The constraints that apply to buying foreclosures mean that serious structural issues won’t come to light until the property becomes yours. While you may be restricted in inspecting the property, you can drive by and scrutinize the exterior and even take pictures from the sidewalk (public property). The condition of the property on the outside will give you clues about the condition on the inside.
Do Your Due Diligence
Don’t take it for granted that the mortgage is the only lien on a house. The property is in foreclosure, there could very well be other liens; investing in a title search beforehand can save a costly mistake.
When buying foreclosures, financing probably won’t work; cash is king – either yours or a partner’s.
Another issue is the redemption period required by your state. This is a waiting period after sale (a period of redemption), during which the previous owner can buy back the property. The seller has an unalterable right during this time to recover the property if they can pay all foreclosure costs, outstanding interest and missed principal payments. The bottom line of buying foreclosures is you could win the bid and still not get the house depending on your state.
Buying foreclosures can be the path to breaking into real estate investing and can be immensely lucrative. Buying foreclosures is a business and most of the bidders on the courthouse steps are professionals aiming to buy the foreclosure for a low price.
Beware of the pitfalls and plan ahead. Work out your maximum bid based on the market value of the property, evaluate the condition, factor in the cost of evicting the occupants and expected profit. Keep your cool and stick to your limit.