With nearly 1.5 million properties foreclosed in the first quarter of 2013, many investors are seeing foreclosed property as a bargain investment, planning to profit from the appreciation. However, investment in foreclosures has its own pitfalls that investors should be aware of.
Distressed properties are pushing home costs down to nearly 35% of their worth in some areas of the country, making this an alluring option for investors everywhere. In fact, the latest statistics show that there’s been nearly a 60% jump in pre-foreclosure inventory.
Prepare to Take Your Time
Purchasing a foreclosed property is an arduous process that can take several months. In rare cases, complications with the bank can also make it difficult to eventually get your handles on the title. While it’s no secret that foreclosed properties are a great value, purchasing them may not be an equally great experience. Understanding that these purchases will likely take longer than traditional real estate transactions will prepare you for the process ahead.
Have a Plan for Financing
If you can’t afford to pay for the home upfront and have to take out a loan, understand that it can be difficult to qualify. Financing foreclosures is typically more difficult than a traditional house, because your credentials must be much stronger in today’s environment. If you’re eying a foreclosed property, expect to put down anywhere from 25-30% and expect higher interest fees on the remaining balance.
No Warranty for Foreclosed Property
Purchasing foreclosed property through an auction is the most risky way to purchase a foreclosed home. Because there is no real estate agent to lead you through the process, you don’t have traditional benefits such as an escrow, title report, or title insurance. Furthermore, it’s expected that the purchase at the auction will be paid in cash.
The property will not come with a warranty, and you will not receive any other safety precautions such as inspections from contractors or pest inspectors.
Build Experience First
While anyone can invest in a foreclosure, this isn’t the best place to start if you haven’t previously invested in real estate. Because foreclosures provide complications concerning the property, laws, loans, deeds, and other factors, it’s important to intimately know how real estate works in the first place.
Foreclosures are certainly a profitable endeavor, but the risks posed require knowledge and experience from you. By understanding the fundamentals of real estate, you’ll be able to invest in a foreclosed property and benefit from the incredibly discounted price.