When buying foreclosure real estate, investors must be financially prepared to invest in property repairs or renovation. While foreclosed properties are priced below market value, homes requiring substantial repair can quickly deplete home equity.
Investors must engage in due diligence by reviewing comparable sales reports and obtaining home inspections, property appraisals, and repair cost estimates to determine the true cost of buying foreclosure properties.
Several options exist for locating foreclosed properties at discounted prices. The most common is to attend public foreclosure auctions. All properties presented through auction are sold in "as-is" condition. Buyers must be prepared to submit payment in full within 24 hours once their bid is accepted. Once realty is transferred, property owners are responsible for removing creditor and tax liens and making necessary repairs.
Another option is to seek out foreclosure short sale homes. These properties are in the midst of the foreclosure process and purchase negotiations take place with lenders' loss mitigation department.
With short sales, lenders agree to accept less than the full amount owed on the home loan. Properties are listed through realtors or sold directly through the bank. The short sale process can be complex and lengthy; taking up to four months or more to complete. Buyers must obtain prequalified financing prior to submitting an offer. It is important to note that banks rarely accept offers lower than the asking price unless property inspections reveal major problems.
Short sale houses can provide investors with a good deal, but may not be the best option for investors who participate in house flipping or plan to use the home to generate rental income. Buyers willing to wait out the process can generally purchase homes at 10- to 20-percent below appraised value.
One way to obtain the best price on foreclosure properties is to seek out private investors who specialize in wholesaling. Some investors and investment groups purchase entire bank portfolios consisting of dozens of bank owned foreclosure properties.
Also known as real estate owned (REO) homes, these properties are houses that did not sell at auction. One of the biggest advantages of REO property is houses are sold with a clean title. When banks regain ownership of foreclosure real estate they remove attached creditor and tax liens and commence with eviction action when foreclosed homeowners refuse to leave the premises.
Investors who buy homes in bulk obtain wholesale pricing and pass savings along to individual buyers. REO homes can often be purchased at 20- to 30-percent below market value and provide investors with instant home equity.
It is crucial for real estate investors to become educated about all facets of buying foreclosure properties. Many newbie investors are tempted by the low price tag of foreclosures, but fail to realize the costs associated with rehabbing the property.
Foreclosures, short sale and bank owned real estate nearly always require some level of repair. Investors must take time to calculate the true cost of the property before making an offer to buy. Otherwise, investors could hold title to a money pit which could take years to financially recover from
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