10 Biggest Mistakes When Buying Foreclosed Property

The economy currently affords many opportunities for individuals to make money on foreclosed properties. As the housing crisis continues, thousands of foreclosed properties are now on the market nationwide. Real estate experts point out that buyers can purchase these homes at bargain prices, yet the best advice is caveat emptor, which is Latin for "Let the buyer beware". Purchasing a foreclosed property may be risky for people who don't know what to look for before investing. Most real estate professionals strongly recommend hiring a professional who specializes in buying foreclosed properties. A good agent will be able to help the buyer navigate through the complicated process and will also be helpful in weeding out the exceptional properties from those that end up being an albatross.

Interesting Statistical Facts About the Downturn in Housing & Foreclosures

In 2008, the United States government allocated over $900 billion in federal funds to rescue the housing market. Foreclosures are dominating the housing market and it's estimated that there are 1.5 million homes currently for sale. Banks put repossessed homes back onto the market in order to obtain a quick sale in order to avoid the expensive upkeep of the property. A recap of the 2009 foreclosure market includes the following statistics:

  1. The market is driven by an unemployment rate now soaring over 10% nationally
  2. There is 1 foreclosure for every 6-10 jobs lost
  3. 60% of foreclosures have been in 6 states
  4. 10% of all mortgages are delinquent
  5. 6 million loans are delinquent or in foreclosure
  6. Over 500,000 Real Estate Owned (REO) Properties are not on the market. An REO property is one that goes back to the mortgage company after an unsuccessful foreclosure auction.

The foreclosure activity is likely to continue into 2011 and the recovery is expected to take several years.

Opportunities in the Current Market

The current economy affords many opportunities for individuals to make money on foreclosed properties. The key to being a successful investor in this market is to be knowledgeable about their approach, which should consist of a strategic combination of timing, researching the market and utilizing common sense.

Mistake Number 1—Flying Solo

The most common mistake people make is attempting to purchase foreclosed properties without the assistance of a real estate professional. When making any type of investment, you will need the help of people who are familiar with the current market who can help you avoid the pitfalls of purchasing an undesirable house. You wouldn't turn over your life's savings to any person who claimed to be a financial consultant, would you? So why take the risk when making an investment that may end up costing you your entire down payment? By trying to do it yourself, you may find yourself swimming with sharks and unable to see the flaws that inexperienced buyers may not be aware of. Finding a foreclosed property worth purchasing takes a lot of research. There are many factors to take into consideration which include:

  • The type of neighborhood where the property is located
  • The condition of the house and property
  • Whether the home is occupied or not
  • Being able to perform a home inspection

Mistake Number 2—Not Understanding the Legal Implications

One of the biggest mistakes people make is that they fail to understand the legal implications of ownership. Before biding, they should consult with a legal advisor who specializes in real estate law. It's possible that the previous owner owed taxes or payments to building contractors. If those debts were secured by the property, they automatically transfer to the new owner who will be responsible for paying these off.

Another item to watch out for is the get-rich-quick gurus. You should avoid expensive seminars that claim to teach you how to make millions of dollars by paying pennies for properties. Investing successfully requires diligence, resourcefulness, and professionalism. It's important to remember that real estate agents aren't lawyers and foreclosure laws can change significantly from state to state. Foreclosures are heavily regulated and every state has its own set of laws.

Mistake Number 3—Obtain a Clear Title of the Foreclosure

It is extremely important to make sure there are no liens on the property. A lien is a legally recorded claim against a property as a means to collect monies owed, such as a mortgage, property taxes, or an unpaid debt owed to a contractor who performed work on the property. The lien must be paid before the property can be sold. There are three basic categories for liens:

Consensual Lien—This type of lien is one in which you agree to by contract such as a mortgage

Statutory Lien—These are laws that take use of state and local regulations to collect an unpaid debt

Judicial Lien—This is a lien imposed by a court against the property that may include auto accident or personal injury lawsuits

The most common types of liens may include:

  • An equitable lien when a property is held as collateral as a means to secure a debt
  • A general lien may be a court ordered judgment, probate action or unpaid IRS taxes
  • A judgment lien, which may be the result of an action by a party or government agency to collect payment of a claim
  • An involuntary lien may be include unpaid state property taxes or be placed by a material supplier who didn't get paid by the builder
  • A voluntary lien where the owner authorizes a lien upon the property as collateral for the repayment of the mortgage loan
  • A Mechanic's or Contractor's lien that seeks to guarantee payment for contracted services

Mistake Number 4—Not Obtaining a Home Inspection

Most banks require a home inspection when lending money for a mortgage. It is crucial to get an up-to-date inspection as the condition of the property can change dramatically in a short amount of time. The American Society of Home Inspectors (ASHI) offers excellent information on how to find an independent home inspector who will have your interests at heart. It is never wise to use a home inspector that the selling or buying agent recommends. Most inspectors will charge a fee of $300 to $500 for the inspection. By performing a bit of research, you can find your own home inspector by visiting the ASHI website.

Mistake Number 5—Not Understanding How to Flip This Foreclosure

In the past, most foreclosures have been the result of unexpected personal misfortune. However, due to the recent economic downturn, many people facing foreclosure have enough money and excellent credit that they could afford to buy several properties at once, hoping to flip them quickly in order to make a generous profit. Those who were caught unaware when the market shifted found themselves unable to juggle the many mortgage payments. Therefore, many buyers found their excess properties headed for the auction block.

For the right buyer, foreclosures are an excellent opportunity to buy a house at a much lower than market-value price. They may be able to shave off between 10 to 20 percent off the current market value. Some will have to put in a bit of sweat equity as many of these properties are often in need of repairs. The key is to find a foreclosure where the cost of repairs doesn't exceed the profit the buyer stands to gain.

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TOP 10 CITIES WITH HIGHEST FORECLOSURE RATES

RANK

CITY

RATE (1 in X Homes)

1

Las Vegas, Nevada

20

2

Merced, California

27

3

Cape Coral, Florida

27

4

Stockton, California

28

5

Modesto, California

30

6

Riverside, California

30

7

Bakersfield, California

30

8

Vallejo, California

35

9

Reno, Nevada

37

10

Port St. Lucie, Florida

38


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