I hear from people all the time that are interested in learning about foreclosures for a variety of reasons. Some people are looking for inexpensive housing that they can invest "sweat equity" into to have a nicer home than they could normally afford. Other people are looking to buy, rehab, and flip a property quickly for a profit. Others are looking to acquire foreclosures to use as a rental property for a more long-term investment. All of these scenarios are achievable if you have the right information to make an educated decision.
Being successful at purchasing a foreclosure requires some preparation. Most Sellers of foreclosed properties require a minimum amount of earnest money to accompany any offer to purchase. The first steps you should take are as follows:
Following the suggestions above greatly increase your chances of having the offer to purchase accepted. Making the transaction successful/profitable from this point depends on your end goal.
- Find a real estate agent that can help you identify foreclosure properties as soon as they come on the market. Time is of the essence in all real estate transactions, but even more so in the foreclosure market.
- Have enough cash on hand to meet any minimum earnest money requirement, sometimes 2% or more of the purchase price. The more earnest money you put down the better your offer looks to the Seller.
- If you will be borrowing funds to purchase, be pre-qualified by your lender and have documentation to support this. Most Sellers require evidence of qualification or proof of available funds (cash) to be submitted with any offer to purchase.
- Be prepared to move quickly. A foreclosure that is priced to sell will not stay on the market long.
- Have a team of contractors available that you feel comfortable with and that will give you written estimates of repair costs in a timely fashion. This will likely include people who do carpentry, plumbing, drywall repair, carpet and flooring, roofing, septic systems, field lines, electrical repair, heating and air, etc.
- Know the local market where the foreclosure is located. Have your real estate agent prepare a Competitive Market Analysis so you can see how much homes in the area are selling for. This is key to knowing how much you should offer for the property.
- If possible, make the offer to purchase contingent upon an inspection of the property. Make the inspection period as short as possible for you to complete inspections and receive bids from contractors for repairs. An extended inspection period will make your offer less attractive to the Seller.
- Expect to find additional problems with the property than you originally identified and budget accordingly. There are frequently property defects that are not identified until renovation begins.
The most common pitfalls that snare the novice investor are as follows:
- If you plan to live in the property, try to have repairs done prior to moving into the home. Renovations are much more difficult after you move in.
- If you are planning to rehab the home and resale for a profit you must be prepared to move quickly. Time is money! If you had to borrow money for the purchase, every day you spend on repairs is costing you money on interest. This can quickly eat into your profit margin. The same is true if you plan to use the property as a rental.
- If you will be selling, work with an agent who knows that market. If the market is served by more than one Multiple Listing Service make sure your agent belongs to both associations. Otherwise, you have severely restricted exposure to potential Buyers, which equates to fewer offers for less money.
Investing in foreclosure properties can be financially rewarding if you take the time to prepare yourself. You should be cautious, but not so much so that you miss an opportunity. Surrounding yourself with the right support staff consisting of a good lender, real estate agent, and contractors will be key to your success.
- Underestimating the cost of repairs.
- Paying too much for a property.
- Getting a good deal on the initial price and needlessly investing too much in repairs or upgrades. The old adage, "You never want to own the biggest or nicest home in the area" applies even more to an investment property.
- Taking too long to get the property ready for resale.
- Not knowing how much comparable homes in the area typically sell for.
- Trying to maximize profit by selling For Sale By Owner. This limits exposure to potential Buyers and can increase time to sell. Remember, every day the home stays for sale means more expenses for insurance, interest and taxes.
Real Estate has consistently outperformed many other methods of investing. If you are considering foreclosures as an alternative to traditional investing, please feel free to contact me. You can request information on foreclosures that will be emailed to you on a regular basis by visiting MyMLS Search and selecting "Search for Foreclosures Only" in the Basic Information field. I look forward to hearing from you.