Purchasing a foreclosure can be a great opportunity to secure a property for a decent price. And while this may sound like a great deal, it’s important to be aware of some potential issues or problems you may face, as well as what you can do to help mitigate your risks.
To help highlight some of the areas where investors and buyers can run into trouble, members of the Forbes Real Estate Council, below, discuss a number of things people should know before purchasing a foreclosure property. Here is what they said:
Members discuss a few things to keep in mind when considering a foreclosure property.
Photos courtesy of the individual members
1. Don’t Skip Mortgage Pre-Approval
When buying a foreclosed home, don’t avoid the pre-approval process when it comes to securing a mortgage. Financing a foreclosed home is similar to other property types—you can work with your mortgage broker to find a loan structure that works for you. If you have everything in place, it will be easier to move quickly and get the best deals. - Melissa Cohn, Family First Funding LLC
2. Don’t Assume It’s A Good Deal
After the recession in 2009, there were many opportunities to acquire foreclosed properties at steep discounts. This trained real estate professionals to see foreclosures as a sure bet. But the market has changed and lenders are now pricing many foreclosures at or even above market even when they need major repairs. Do your homework and don’t just assume a foreclosure is a good investment. - Marc Rutzen, Enodo Inc
3. Perform A Title Search
A clean title is crucial, as properties may carry liens, judgments and violations. Work with an experienced attorney to run the title on the property prior to making a decision to buy. – Sohin Shah, InstaLend
4. Avoid Unfamiliar Properties Even At Low Prices
Foreclosures are big business for many investors, but gambling on a low-priced foreclosure outside of your investing experience is a huge risk. It’s likely you can only inspect it from the outside, so you need to be experienced enough with the property type to spot signs of structural damage, an illegal addition, mold, etc. without interior access. Not accounting for these will kill your profits. - Daniel Huertas, Washington Capital Partners
5. Understand What’s Around The Property
If you’re off to the auction to buy a foreclosed property, do as much due diligence as possible. Do not buy a property sight unseen. You might find yourself owning property next to a chemical plant, railroad or some other nuisance that will diminish the value of the property. Driving around the neighborhood and putting “eye” on the property can give you an idea of property value. - Nancy Wallace-Laabs, KBN Homes, LLC
6. Get Your Financial Ducks In A Row
When considering purchasing a foreclosed property, you’ll want to avoid not being ready to move on a property because your financing is not ready. It’s imperative to make sure that you are aligned with a lender that can move quickly on a property and close fast. Otherwise, it could be gone. - Don Wenner, DLP Real Estate Capital
7. Be Empathic
If you’re purchasing a foreclosure from the bank, that’s one thing, but if you are purchasing a pre-foreclosure from an owner, empathy is the best strategy. When someone is losing their home, they usually feel like their world is falling in around them. Don’t focus on price; focus on a plan that will get the homeowner from their current situation to a much better one and you will gain their trust. - Darwin German, DGRE Real Estate
8. Buy The Bones, Not The Bling
When you are looking to flip a property, avoid buying a foreclosure based on its bling instead of its bones. Cosmetic changes may be easy, but you can’t put lipstick on a pig. If the home’s systems—heating/cooling, plumbing, electrical—or its bones are going to fail, that will wipe out your profits. A good inspector will uncover that, so a quick makeover only works if the bones are solid. - Kevin Hawkins, WAV Group, Inc.
9. Be Aware Of Liens
Be sure to check the title work! If a bank foreclosure, make sure you know what position the lien was in. If it’s a second, you’re still liable for the first lien and the “deal” you thought you bought could bite you. Also, know that many title companies won’t insure title on a tax foreclosure for a number of years after the sale due to uncertainty in the filing procedures for the county. - Randal McLeaird, SA House Buyers
10. Don’t Treat It Like A DIY Project
Buying a foreclosure property is the quintessential “buyer beware” situation. A potential buyer should never assume they are getting a bargain or that acquiring the home will be simple and easy. It’s not a DIY weekend project. Retain a real estate agent who has both accreditation and experience in foreclosure sales to guide you and facilitate the process. - Joe Houghton, RE/MAX Results/The Minnesota Property Group Team
11. Always Visit The Property In-Person
There are real estate investors who purchase foreclosures without ever stepping foot on the property. These investors make up for the losses they incur on a few of these foreclosures by doing a lot of volume. If you’re not purchasing foreclosures in volume, then always be sure to see the property in person so that you can get an eye on repairs that may not have shown up in the listing’s pictures. - Ben Grise, InvestWithBen.com
12. Don’t Go It Alone
The biggest thing to avoid is going at it alone. Most buyers will need the guidance of professionals that have experience in foreclosure transactions. This includes real estate agents with local market experience, lawyers to navigate laws and regulations, and property inspectors to identify structural issues. Additionally, a mortgage banker can help determine the amount of home you can afford. - Ari Rastegar, Rastegar Property