The Dos and Don’ts of Investing in Foreclosures

Last week we talked about whether or not investing in short sale properties is right for you. This week, let’s talk about the other distressed property investment: foreclosures. Again, distressed properties can be really tempting and truly show strong returns, but there is no reason to be hasty about your decision. Even though the foreclosure process can have the feel of urgency, if you don’t do your due diligence, research the property and form a strategy, it can cost you more than it’s worth. This is not to say that you shouldn’t give it a try—it’s just a fair warning—educate yourself before pursuing a property in foreclosure:

Do:

• Select a property that is located in an area slated for redevelopment or improvement. Know the potential for job and income growth, population growth, demographic changes and infrastructure development.
• Research the property. You need to know if the electrical is intact, if there is a lien against the property or anything else—legal or cosmetic—that you will be responsible for after purchase.
• Develop a strategy before purchasing the property that includes methods and goals for acquisition, holding and unloading the investment.
• Go for a property that has unique, positive qualities that set it apart from other properties in the neighborhood.
• Expect that a foreclosure will take less time than a short sale.
• Work with a realtor who specializes in foreclosures.

Don’t:

• Rely on gaining your profit from the difference between the auction price and the potential value of the property.
• Hang out on the courthouse steps; meaning, there are alternative ways to acquire distressed properties than the waiting until they go on the auction block. Use your contacts to research the property and then pursue acquisition through less desperate channels. For example: You can help struggling homeowners before their lenders fully give up on them and you can build trust with them so that they think of you first, in the instance that they must sell the home.
• Purchase a foreclosure if it will clearly require more than 5-10% of the purchase price for renovation.
• Assume you have little competition. Because foreclosed properties often appear as screaming deals, there are ample buyers ready to bid. It takes a deft, shrewd investor to know which properties are worth the effort and negotiate a win.

Expect that buying a foreclosure will be quick and easy. Yes, it usually takes less time than a short sale, but sometimes you have a lot of red tape to cut away.