Investing in real estate is one of the oldest and most popular forms of investment, which if done smartly can be quite profitable too. Now that, unfortunately, there are many foreclosed properties on the market, investing in such type of real estate seems very appealing. And while it can bring great profit it also hides many pitfalls and traps that can endanger your investment and lead to losing your money. It is safe to say that investing in foreclosed property is definitely not recommended for beginners and even the more experienced should stick to some rules and principles for a successful deal.
What is a foreclosed property?
As an owner of commercial or residential property you have the obligation to pay your mortgage installments on time. If you fail to do this and especially if you delay a payment for more than 90 days the lender can serve you with a foreclosure. That is – they will take your property and try to sell it at an auction to get back at least some of the money that you owe them. This kind of property is referred to as foreclosed or distressed property. If the property is not sold at the auction the lender becomes the owner and then the property is known as REO – real estate owned. Sometimes the owner, who is served with or faced with a foreclosure will try to sell the property prior to the action and if you buy it, then you are again purchasing a foreclosed property. You will find more details about these three types of properties and the respective deals in the paragraphs below.
Some pros and cons of investing in foreclosed property
Purchasing a foreclosed property for investment or for accommodation can be a smart deal but it should be done with proper care, since it has its pros and cons.
- Some of the benefits of turning to this type of property are: you can get a bigger house for the same money or you can buy a house in a better neighborhood than you can normally afford, if the property is in a good condition you can buy and resale it quickly making a nice profit, you can turn such a property into a source of income by renting it out. So the main conclusion can be that you can get more for less.
- There are quite a few risks, however, that are associated with such deals. Some of them include: the property is in much worse condition than you thought and needs a lot of funds to be livable, there are significant unpaid bills, taxes and other encumbrances, the deal was not concluded in full compliance with the law and you end up losing both your money and the property, etc. The advice in this case is that you should always consult the competent players in the field – attorneys, experienced real estate agents, inspectors or contractors, prior to signing any deal.
Always remember that investing in foreclosed property is not advisable for beginners in the real estate business and if you are in doubt about the deal better walk away then fall into a pitfall that will bring you only sorrow and financial troubles.
Foreclosure stages and when to buy
There are three main stages of the foreclosure process during which you can buy the property and there is a different level of risk associated with each. These three options are:
- Buying a pre-foreclosure
- Participating in a foreclosure auction
- Purchasing directly from the lender after an unsuccessful auction
The most risky of the three option is actually attending an auction and buying the foreclosed property there, since the property is sold “as is”. This means you buy it with all the encumbrances it may entail and on top of that you get no warranty whatsoever and usually you have to pay the full purchase price in a month or even in a week or you lose your deposit.
The next in line in terms of risk comes purchasing a pre-foreclosure. This entails a lot of both legal and physical (related to the property) risks. First of all, in some states there are strict laws regulating the sale of such type of properties and if the law is violated you may end up not only losing the house you bought but also being guilty of a fraud. Another possibility is that you buy the property pretty cheap and then the bankruptcy trustee declares that this was a fraudulent act on behalf of the seller who tried to get rid of or hide an asset that might have helped his creditors get back some of the debt. Then you might be forced to deed the property to the bankruptcy estate. In order to avoid such problems you will need to consult a knowledgeable foreclosure attorney who is also dealing with this side of the matter. The other downside of the pre-foreclosure deal is that you have no information on the actual condition of the property or whether there are significant outstanding bills, etc. Usually, the seller tries to finalize the sale quickly, and sometimes, so does the buyer, and therefore they skip checking these essential details. However, if you do your homework properly and check both the legal situation and the physical status of the pre-foreclosed property, you may end up having a good deal.
The least risky of all three options is to buy a REO (real estate owned) property or that is a property that is owned by the lender since it was not sold at an auction. The deal is similar to any regular deal, however you still need to take into an account that this is a foreclosed property that might be in a bad condition or has some legal issues. Always double check everything before signing the contract.
The overall conclusion is that buying a foreclosed property is not the easiest way to get rich quickly since it has a lot of traps and pitfalls, especially for the inexperienced buyer. It can turn out to be a good deal, however, for first-time homeowners as you might get a bigger house or in a better location at a lower price. No matter if you want to invest in foreclosures in order to make money of that or to actually live there, always make sure to sign proper contracts, run all inspections, consult a lawyer and visit the property yourself, if possible, to make sure that you really get what you pay for.