According to RealtyTrack, a real estate data company, there were 1.36 million properties in foreclosure in 2013. If you are the entrepreneurial type who is always looking to make a buck, then investing in foreclosures may be a good idea.
But before you jump in with both feet, you should consider the time, energy, and effort required for these investments. There are several things to consider before buying a foreclosure investment for the first time.
6 Tips to Keep in Mind When Investing in Foreclosures
1. Get ready to work
If you choose a foreclosed property that is infested with cockroaches, has a poor infrastructure, or is in need of cosmetic work, you will have a lot to do before you can resell. And if you’re not well-versed in home improvement DIY, it can become a time-consuming and costly endeavor. Get quotes on the work needed to make sure you actually have the money needed to flip or rent the house before you sign on to purchase.
2. Prepare for the Total Cost
Property taxes, home owner’s insurance, mortgage payments, and maintenance all eat away at potential profits. This is especially true if you have to sit at home for a while while you make repairs and wait for a buyer or tenant. Depending on the market, it may take months (or even years) for you to experience positive cash flow.
3. Make sure the title is clear
If the title of the house you have bought is not clear, you may not be able to sell it without paying the outstanding liabilities for the property. Your best bet is to contact a professional title company or real estate attorney to verify that the title is clear. There is an expense involved, but it is well worth it in the long run.
Connected: 6 Tips for Buying Property at Foreclosure Auction
4. Research State Laws
Foreclosure laws vary by state, so do your homework to make sure you understand the rules and regulations governing the purchase. The last thing you want is to invest in foreclosure only to find out that you are not in compliance. Visit your state’s attorney general’s website for more information.
5. Look into REO
An REO, which stands for “real estate-owned,” refers to property that the bank officially owns. This is slightly different from a foreclosure, which must go through a foreclosure auction before returning to bank ownership. Since most banks and financial institutions are not interested in managing real estate, they are often willing to negotiate a lower sale price for REO properties in order to recoup some of their original investment.
6. Get a Professional Inspection
Always invest in a professional home inspection before purchasing a foreclosure. Even if you have a solid eye for essential home repairs, a professional inspector can uncover less obvious problems with electrical, plumbing or foundations. Check the American Society of Home Inspectors website for help.
Connected: What investors should know about the home inspection process
Investing in foreclosure is not for the faint hearted. This doesn’t mean you should be shy; Just know what you’re getting into before you dive in. The housing market is volatile – before you get involved, make sure you have the stomach for uncertainty.
Are you preparing to invest in foreclosures? What are you worried about?
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Note by BiggerPockets: These are the views expressed by the author and do not necessarily represent the views of BigPockets.
