Avoid Pitfalls When Buying Foreclosures

Buying a foreclosed home is no easy task. It can be a easy way to lose money if you aren't knowledgeable and careful of what you are getting yourself into. Here are some points to consider before diving head first into the foreclosure market.

• Avoid outstanding liens. Make sure the property has a clean title. Any outstanding liens and fees incurred by the original owner will be transferred to the new buyer. There may be utility liens, vendor liens or other judgements against the property. As a buyer of a foreclosed home you will be responsible for settling the previous owner's debt on the property.



• Bid conservatively. The market in many places is still depreciating. That unknown added to transaction, repair, and marketing costs could sour the deal. Lenders are already taking a huge loss when a home is foreclosed. You would be best advised to make the lender an offer on the foreclosed property you are interested in. Some lenders are willing to deal even further just to get the property off their books. Other lenders have been known to be firm on the asking price. It never hurts to make an offer and see what they say.



• Beware foreclosure concentration. Prices in neighborhoods where there are lots of foreclosures have declined the most – and prices in these areas are still declining. A buyer should confirm that there’s an opportunity to make money if prices fall another 15 percent. This is a tough point to consider since there are foreclosures EVERYWHERE. Most neighborhoods where homes were built in the 2000s are full of foreclosures and short sales. Its just the fact that these homes were all purchased at inflated prices with adjustable rate mortgages. Buyers burned themselves by buying more house than they could afford and then over paying for it with a terrible mortgage product.



• Beware the appraisal. If the price is discounted from an appraisal done before August 2007, it is almost certainly unrealistically high. In late 2007 and 2008 the market has dropped around 3% per month. Prices from 9 months, even 6 months ago are not indicative of the current market. Due your own due diligence and have someone pull the "comps" for you and pay for a real appraisal. It could save you from seriously over-paying for a house.



• Cash is king. Even a buyer with a renter lined up and enough money for a 20 percent down payment needs still more cash to weather another two or three years of a depressed market before unloading the property. Most landlords in today's market are house rich and cash poor. They have this expensive property and the income being received on that property most likley only covers a portion of the expenses of owning it. There are many landlords who have negatie cash flow and cannot weather the storm. They can only sustain paying out of their own pocket for so long. Eventually it will become too much to bear and the owner will no longer be able to supplement every month. The property will end up in foreclosure as well.