Investing in Foreclosures

There are a lot of properties on the market right now that are foreclosures. They are typically priced lower than comparable homes, but there is a perfectly valid reason for that: foreclosed houses are usually in worse shape than other houses that are put on the market. Maybe one of the biggest reasons has to do with the fact that people tend to vandalize the houses before they vacate them for the bank to repossess them.

What this means for the real estate investor is that he has to be ready to invest some money in the house for repairs and/or renovation. So even though you find the house at a price that is below market value, if you don’t compute those expenses before you make the purchase, you may find out that whatever equity you had (based on the good initial price) will quickly vanish because you have had to spend so much money to bring the house to the point where it can be sold.

So before you even start committing yourself to the process, you really have to do your homework. This means doing due diligence by reviewing comparable sales reports of homes in the area, obtaining home inspections to determine whether the house is worth buying, property appraisals to find out how much you can expect to get, and repair cost estimates (with the inspection as a starting point) to determine the true cost of buying any foreclosure property you’re considering as an investment.

It is crucial for foreclosure investors to educate themselves about every single phase of buying those properties that are often distressed. The fact that they almost always require that you spend additional money adds a new wrinkle to the process. The low initial price tag has attracted many newbie investors, who simply underestimate the price tag that comes with those houses.

Any type of property that has been repossessed by the bank will typically require some level of repair. Diving in without knowing what your total cost will be is a recipe for disaster.