How safe are real estate foreclosures investments?
There is no nice way of saying this - real estate foreclosures are a gamble. While many foreclosed properties sell for less than market value, property is sold 'as is' and buyers have no legal recompense if the home fails to live up to expectations.
One major problem with buying foreclosures is that foreclosed homes tend to be in a poor state of repair. Homeowners who default on home loans are rarely up to date with essential maintenance and buyers must often make a sizeable investment to return the property to a condition where it will sell for a profit on the open market.
In a best-case scenario, you may have time for a quick look round the property to assess the likely cost of repairs and renovations. However, there is rarely the time or opportunity for a formal inspection. In a worst-case scenario, you may have to base your appraisal entirely on the exterior of the property. It helps to have a buffer of spare investment capital to cover unforeseen costs.
Another problem is that pre-foreclosure and auction sales must be paid for in full at the time of sale. This involves handing over a large sum of money for a property that you actually know very little about. If you buy at auction, it may be impossible to get title insurance, which will leave you high and dry if someone else disputes ownership of the property. You should also be very wary of outstanding debts secured on the home.
REO (Real Estate-Owned) property tends to be a safer investment. These are the kind of foreclosures sold through private real-estate brokers, the Department of Veterans Affairs and the US Department of Homes and Urban Development. Finance is usually available but profits are much lower and brokers only sell for less than market value if there is a glut of properties on the market.
It may be worth paying for some foreclosure investment training and advice before you start your house hunt. The best leads are rarely those advertised on websites and public lists and to make a serious profit, you normally need to follow the difficult pre-foreclosure route. The website www.foreclosures.com is a good place to find out more information.