5 Questions to Ask Yourself Before Buying a Foreclosure

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The following post comes from David Bakke at MoneyCrashers.com.

Although the housing market seems to be recovering, foreclosures are still available in most areas of the country. The benefits of buying a foreclosed home, whether it’s for occupancy or resale, are many.

However, it’s not something you should dive into without preparation and consideration. Taking on a foreclosed home involves a lot of hard work, and you really need to know what you are doing, especially if you are new to this type of venture.

With that in mind, here are five questions to ask yourself before purchasing a foreclosed property:

1. Can I handle the project?

Purchasing a foreclosure involves a great deal of time and effort. By no means is it as simple as buying the property, fixing it up, and selling it for a tidy profit. There’s much more work involved.

For example, the paperwork can be extensive, and you’ll need to deal with multiple third parties. Then you’ll get to the labor aspect. If you’re planning on doing most home improvements yourself, they’ll require a substantial time investment. But if you plan on outsourcing upgrades, you’ll significantly increase your overall investment in the property.

Also, most foreclosures have been unoccupied for a long time, which tends to drive up repair costs. In short, whether your motivation is to flip the house or get into a new home on the cheap, buying a foreclosed home is a complex undertaking.

2. Can I handle the risk?

Another thing most people fail to realize is that purchasing a foreclosed property is not an automatic financial home run. There’s definitely risk involved. For example, foreclosed properties are usually sold “as-is.” So if you find out after your purchase that the home needs more work than you originally thought or were told, you probably won’t have much recourse.

Plus, it’s not a sure bet that your foreclosed property will increase in value. Some properties won’t appreciate as fast as you’d like, no matter how much time and money you invest. Therefore, objectively assess whether you can afford a loss before deciding on a foreclosure.

3. Have I done all my homework?

You can never do enough background research when it comes to purchasing a foreclosure. Start off with a broad list of potential foreclosures you might be interested in, and slowly narrow it down. Then, once you have your short list, thoroughly go through the following steps:

  • Do a free Internet search on the property. This will give you key information such as when it was built, when and what it previously sold for, and a detailed description of the home’s amenities.
  • Research the history of the property to find out why it became a foreclosure. Your resources here are county offices, the previous owner, and your real estate agent if you have one.
  • Speak with the neighbors. They can usually provide information you wouldn’t have access to anywhere else.
  • Research comparable sales values. Zillow.com is a great resource, as is your real estate agent, who can get you recent area comps.
  • Research the status of the title. Do this through a title company that can complete a professional title search.
  • Research your financing options. Find out beforehand what interest rate you can expect to get on a loan before jumping in. If the interest rate is too high, the whole idea of buying a foreclosure may need to be scrapped.

By no means is this a comprehensive list of everything you need to look into, but it’s a good start.

4. Am I ready to rent until I can sell?

If you intend to resell, keep in mind that this won’t happen overnight. Even though foreclosed properties can be fixed up and resold for a profit sometimes, this may require a good bit of time to happen. It may even mean you have to rent the property out until it can be sold. In fact, you could have to rent the property for years until a suitable buyer comes along.

Remember, the area in which you are considering buying a foreclosure probably has other foreclosures on the market as well, which will ramp up the competition. That being the case, are you ready to be a landlord? This opens up a whole new can of worms and potential headaches. If you go through with a foreclosure purchase, make sure you’re ready for them.

5. Do I have access to the right professionals?

You’re going to need help from professionals if you’re serious about purchasing a foreclosure. Don’t be so arrogant as to think you can handle the entire process on your own. That could be an expensive mistake. Among others, you’ll probably need assistance from the following…

  • Real estate agent: To help you find the best property for your needs.
  • Attorney: The legal aspects of a foreclosure purchase can be complex – including the tax consequences of a foreclosure.
  • Home inspector: You definitely want a thorough home inspection on the property before making your final decision.
  • Appraiser: To understand the actual and potential value of the property.
  • General contractor: To give you an idea of how much improvements and repairs are likely to cost.

Final thoughts

Two friends of mine have direct experience with purchasing foreclosed homes. One purchased his property at a price well below market value, upgraded it, and is currently occupying the home. When the housing market comes back around, he stands to make a tidy profit.

My other friend invests in these properties to resell them and his results have been mixed at best. Remember that regardless of your primary motivation for buying a foreclosed home, there is risk involved and a lot of hard work. But, if you play your cards right, you can make a bundle from purchasing a foreclosure or get a great deal on your primary residence.

Have you had any direct experience with foreclosures? If so, how did the process go for you?

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