10 Things To Keep In Mind Before You Invest In Foreclosure Homes

By on June 10, 2014

You have probably never bought a property in foreclosure. But you can instinctively agree that it presents good opportunities to acquire homes on the cheap. Who can deny that a buyer with cash ready to throw in the ring is a very attractive proposition to the very people who needs to sell their homes. But as you would expect, there are a number of pitfalls you can fall into if you do not navigate this road carefully. Here are some tips to go through before making that move that you are itching to make.

Not every listing is an opportunity

Remember that the people on the other side of the fence wants to get as much as possible out of your even though they expect you to low ball. In fact, don’t be surprised at all when the quoted price is market value rather than the 50% below you were dreaming about. And when prices are surprising low, you must start thinking why that is so. Creditors want their debts paid and they can go to great lengths to achieve their goals. Do your research beforehand.

There is no deal you cannot walk away from

The listing that you are eyeing can be a very attractive one. But if the terms of purchase are not as favourable as you wanted, you should walk away without getting emotionally attached. No matter how tempting a foreclosure opportunity seems, there will always be a comparable deals elsewhere. And it could be even better. You are not buying a home where you need the exact angle view of the sea. You are buying an investment so your numbers give you a smile at the end of the year. Don’t forget that.

Never make a purchase without conducting your research

In supermarkets, the items that go for 90% off are often those that are expiring soon. There tends to always be a catch with deals that look impossible on the surface. So restrain yourself from making a buying decision solely based on price or affordability. At least conduct basic diligence by asking for opinions from professionals active in the market. And don’t let the convenience of the internet go to waste.

Help yourself instead of others

Some people might be sold on the emotional aspect of a deal. Sellers could be facing very tough financial situations that require a quick sale as a good price, for them. Being the great personal you are, you could be tempted to help out these sellers by paying more than you originally have budgeted. This will not be good for you bottom line. You are trying to tie down a good investment, not trying to be charitable.

home on the marketAre you sure you can handle this?

The most taxing mistakes in real estate investing is in buying the wrong type of property. Sometimes, investors take too big a bite at real estate when they are not ready to do that. For example, those that buy multi-family homes or whole buildings for the first time very quickly learn that it is a whole different ball game compared to managing a single family house.  You can choose to outsource the management of big projects to property management companies. But do you know how to manage these vendors?

Short term strategy

It can be obvious to everyone that if you purchase a house at 20% below market value, you can quickly make a profit by flipping it in the open market.  But if that is so easy, why is the seller not doing it himself? When you have a target price set, try to be disciplined and sell when that target is reached. The dream of allowing prices to climb higher and higher is also a common mistake made by stock enthusiasts. And the solution is always sell at your target. This applies to real estate as well. If holding on to a losing stock is not a good position to be in, holding on to a losing property is even worse as real estate is much more difficult to let go.

If everyone is selling, then where are the buyers?

If the market is in such a condition where foreclosures are putting huge pressures on prices, you should rethink your strategy of reselling the house in the near term. Because who is going to buy from you when everyone else is selling. And why buy from you when buyers can buy their own foreclosure homes themselves. With this in mind, you must teach yourself on how to add value to your assets.

Mortgage loan to value

If you are getting a property at 20% off, you might think that you should be able to get the bank to lend you 80% of the property value, enough to fully finance the purchase. That is wrong. Banks lend at a loan to value based on the property value or the purchase price, whichever is lower. Lender who are agreeable to you radical ideas will without doubt charge you a high fee. Don’t fall for this trap.

Lingering liens

If someone, like a contract for example, places a lien on the property, it will stay there even after ownership is transferred to you. Foreclosures does not necessarily erase all liens that tag along with it. There are instances where they can still linger around making you liable for it. So run a proper search before proceeding with any purchase.

Make a pre-emptive strike

You can possibly make a deal with the seller even before foreclosure takes shape. This will avoid a lot of the red-tape and parameters where you can work with. If the seller is receptive, you could even arrange some sort of seller financing arrangement that allows him to keep his home while you start generating a cash flow from it. It will be up to your prospecting sources to identify these sellers early and make you move. It will also be up to your creativity to propose a structure of creative financing that will meet the needs of all parties involved.



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