Buying Foreclosures Can Be Risky

This is a guest post form Carson Brackney of Personal Finance Analyst. If you like what you see here, please consider subscribing to their RSS feed.

There’s always someone trying to find a silver lining when the skies are gloomy and gray. So it is with home foreclosures. Amidst all of the hand-wringing and sad tales of people who have lost their homes, there are those who see half-full glasses sitting on the counters of empty houses.

Some say that it’s time to buy these foreclosures. After all, properties that have been foreclosed upon are often sold by banks for a fraction of their full value. With the real estate market somewhere near its probable bottom, this is a good time to stock up on investment properties at a cut rate.

It’s enough to get a would-be real estate tycoon excited. And it does. Encouraged by those who advocating foreclosure purchases (and who are often selling guides or putting on seminars to teach you how), many novice players in the real estate field are gambling on bank-owned homes.

Is buying a foreclosure a good idea?

In some cases, it probably is a good idea to buy foreclosed properties. There are amazing bargains during a market downturn like the one we’re currently experiencing and there’s a strong probability that some of these cheap buys will turn into high-margin moneymakers for their owners within a year or two.

Those success stories, however, will be tempered with some very disturbing tales of woe. Buying a foreclosed home comes with a special set of risks and may not be an appropriate investment for those with little or no experience in the field.

Maintenance nightmares

There’s the question of upkeep, of course. This is a serious issue with foreclosure properties on multiple levels. First, by the very nature of the situation, you’re dealing with a property that was maintained by someone who was unable to make mortgage payments. It’s not a stretch to imagine that maintenance concerns weren’t addressed when the owner wasn’t able to make his or her payments.

Second, the banks who hold foreclosed property don’t have that old “pride in ownership” thing working for them. Banks are property managers and they often allow foreclosure properties to slip in terms of care and maintenance. By the time a home is “up to snuff” it may no longer be a bargain.

The ugly economy that has contributed to the rash of foreclosures we’ve seen adds another risk to the purchase process. Many homes are partially or completely gutted by owners during the foreclosure process in order to raise money.

There are homes in which floors have been completely removed, cabinets have been torn from the walls, and even kitchen sinks have been yanked out and sold. These owner-gutted properties often don’t turn out to be a great bargain after the new owners handle necessary renovation and repair.

Foreclosed homes are generally sold “as is”, meaning that the buyer assumes a great deal of risk in the transaction. An example of this is the story of a couple who bought a foreclosure only to discover that it had a serious mold problem. A lawsuit ensued, and this foray into foreclosure-land failed to turn into a profitable investment.

Look before you leap

If you’re a newcomer to the world of foreclosures, you might want to think twice before jumping in. If you’re convinced that you can find that perfect investment property, however, enter the arena with the right plan. Be careful, demand a full inspection prior to escrow, and consult with realty professionals who’ll help you to mitigate your risks.

It’s wonderful that some people will find that half-full glass on the kitchen counter of a foreclosure property. Unfortunately, too many buyers will learn that the kitchen counters, and maybe even the pipes beneath them, have been ripped out.

5 Responses to “Buying Foreclosures Can Be Risky”

  1. Anonymous

    Though it sometimes seems everyone is looking for a foreclosure to buy, it really is a venture best left to those who do it for a living, otherwise it can be a real money pit or worse.

    Financing is a conundrum. The bank selling the property wants to sell it as is. But if there are issues of safety or livability, you won’t be able to get a new mortgage unless the problems have been cured. If you already own a home and are buying for investment or a flip, the bank won’t want to grant maximum financing. They may require 20% down or more.

    Rehabbing is another problem. If you plan on buying a foreclosure then hiring out contractors to do the work it can get really costly. Often times the cosmetic repairs that are undertaken reveal structural problems that can add thousands to the cost. Unless you have the ability to do many/most of the rehab yourself, don’t by a wreck.

    Much profit potential, but you’ll have to navigate a minefield to reach it. It’s not an undertaking for the risk adverse!

  2. Anonymous

    Another thing some don’t consider: has the home made the “abandoned property” list (or similar) in the City it’s located within? In my City, being empty with no utilities currently running equals “abandoned”. When you make that list, you must bring the home up to CURRENT code to get a certificate of occupancy. That’s a tall order when the housing stock is mostly 50+ years old.

    Just sayin…..

    Also: many Cities, in an effort to reduce rentals, have placed moratorium’s on new rental properties. This could also hamper things.

    Good luck out there!

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