Real estate investors often consider foreclosures profitable investments. While this may be the case for savvy and experienced investors, they can often carry a number of risks for less-experienced, first-time buyers. Tempting as foreclosures may seem, buyers need to educate themselves beforehand in order to avoid these five common mistakes.
Mistake #1 - The Sticker Price
While the price you negotiate for a foreclosed home may be significantly less than its value just a few years back, many such homes often require substantial repairs. Even if a house is only a few years old, it can deteriorate quickly. Therefore, unless you are planning on making these repairs yourself, be prepared to reserve an additional 10 percent of the purchase price for potential labor costs. It's important to keep these repair costs in mind when negotiating, so you do not end up foolishly over-investing in a foreclosed property.
Mistake #2 - Waiving The Home Inspection
Foreclosed properties are often advertised "as is" with higher discounts offered to buyers willing to waive a home inspection -- something (for reasons stated in Mistake#1) a buyer is never advised to do. Often such homes are neglected by owners who stopped caring about their home once they stopped making their mortgage payments. Inspections on many foreclosed properties commonly reveal leaky or damaged roofs,rotting foundations, malfunctioning plumbing, electrical, and mechanical and heating systems, mold and radon contamination and termite infestation. Without having an experienced home inspector examine these components thoroughly, a buyer could inherit a much larger and costlier repair job than expected.
Mistake #3 - Flipping
With many foreclosed homes expected to decline significantly in value in the near future, you need to think of a foreclosure as a long-term, rather than a short-term, investment. If you are just trying to cash in on a quick flip, a foreclosure is not for you. Only investors with the financial resources and patience for a long-term real estate investment and homeowners who can afford a fully amortized fixed-rate mortgage should consider buying a foreclosed property,
Mistake #4 - Location
Inexperienced buyers often assume discounted prices offered on foreclosures will compensate for a location in a less desirable neighborhood. As with any other kind of home purchase, your search should always focus on the worst homes in the best neighborhoods, to ensure yourself of the highest resale value in the future.
Mistake #5 Cloudy Title
If you find a foreclosure property you like, request a title search be done right away to ensure there are no liens on the property resulting from such debts as unpaid mortgages, home equity loans, or unpaid property taxes. These judgments often include late fees and other fines, and must be satisfied before the property can be sold.
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