What to Look for in a Foreclosed Home

Summary: The first thing you should look for - or look forward to - is weeks and even months of diligent research. The opportunities in foreclosed homes often fall into the old adage, "If something sounds too good to be true, it usually is." What is true is that some foreclosed homes will sell at 30% to 40% below market. But according to the editor of one real estate investor's publication, "Most foreclosed homes sell at 5% below market."

The first thing you should look for - or look forward to - is weeks and even months of diligent research. The opportunities in foreclosed homes often fall into the old adage, "If something sounds too good to be true, it usually is." What is true is that some foreclosed homes will sell at 30% to 40% below market. But according to the editor of one real estate investor's publication, "Most foreclosed homes sell at 5% below market." Location If the foreclosure opportunity you're looking for is an investment opportunity, then you would be wise to review five years or more of real estate sales history in the area. Have the homes appreciated sufficiently to make your investment risk worthwhile? The property doesn't have to be in an exclusive neighborhood, but it should be in an economically stable area. This is not an issue of who is moving in and who is moving out, but rather how much is being paid for the homes changing hands. One recently introduced factor to consider if you're looking in the Southeast is the cost of homeowner's insurance and coverage for windstorms. You might find some real bargains in Hurricane Lane there, but also find yourself buying a house you can't afford to insure. You will also find areas where flood insurance is simply no longer available. Physical Condition Consider the circumstances of a foreclosure. Most people lose their grip on their homes after struggling to meet mortgage payments for an extended period of time. That probably means the home has received little or no maintenance, and the property you're inspecting may appear to be in poor shape. If it's in a quality location however, ignore the condition for the moment, take note of the obvious signs of deterioration, and incorporate rehab costs into your calculations. Analyze the Competition Keep in mind that just as in any commercial real estate market, you are bidding against professionals. There are people in most areas who make a living from buying foreclosed properties, cleaning them up and putting them right back on the market. Professionals operating in that fashion may not be willing to bid up near market price for the neighborhood, but with any well located property you're not going to walk away with a "steal." Take a look at recent foreclosure sales in the area and see if you can find a pattern in the successful bids - how far below market are they? Clean Title With any foreclosed property you need to look closely at the condition of the building's title. Check to see if there are any liens on it other than that of the lender who is selling it. If you can, determine if the former owner is embroiled in any lawsuits that could conceivably lead to a challenge of the sale and tying up the property. In theory, once a property reaches the foreclosure stage it is going to market unencumbered. That means nothing to an attorney who sees opportunity in attempting to delay disbursement of the former owner's principal asset. Delay is the operative word here; if you're going to invest in a property you need to be able to put it to work for you with dispatch.