When a real estate professional encounters a really mint property in foreclosure, their first intuition is to buy it. You typically get great deals when you find a property a bank is foreclosing on. More often than not, you can snap it up for a steal of a deal.
Yet, there’s always an element of concern when it comes to foreclosed houses. Real estate professionals should be wary not to leap into a purchase with both feet without understanding the complications that such a property may have. The price isn’t the only thing that should be considered.
Here, 12 experts from Forbes Real Estate Council offer their insight into what actions real estate professionals should do before purchasing a foreclosed property.
1. Do Your Due Diligence
Buying a property in foreclosure can be great but not only must you act quickly in such a competitive market, you also must conduct due diligence and always have an exit strategy. Preparation is a must, so having a great team of brokers, real estate attorneys, contractors and a financial advisor can be the difference between a good or bad investment. Do your homework and act quickly. – Julian Williams, The JW Group | Compass
2. Always Do A Title Search
If you are buying a foreclosure, one of the most important steps is a title search. Lien holders sometimes do not provide you a clean title and with the money you could be spending, it is better to be safe than sorry. – Joseph Zoppi, Templar Real Estate Enterprises
3. Take Advantage Of All Inspections
Even though on the surface it might look like a great deal, make sure you take advantage of all inspections that are afforded to you. Also, keep in mind that if the property is in need of a lot of work, it will likely impact your ability to obtain financing. – Andreas Johansson, Berkovitz Development Group LLC
4. Know The Laws
Just because you bought it, doesn’t necessarily mean you get to keep it. State laws vary but in some cases, the former homeowners can “redeem” or “reclaim” their home after a foreclosure sale. The period of time to redeem or reclaim the property varies as well. Ultimately, you should partner with a real estate professional who has expertise in the foreclosure/REO business. – Mike Miedler, Century 21 Real Estate LLC
5. Understand IRS Lien Impacts
In addition to mortgage liens, the IRS can also record a lien on a property. The IRS gets 120 days to redeem the foreclosed property. This doesn’t happen often, but if the IRS chooses to redeem the property, it will become the legal owner. The IRS only does this to recover the excess foreclosure sale proceeds to apply to outstanding debt. – Pam Scamardo, TPK Properties LLC
6. Expect Extensive Maintenance
When buying a foreclosure, expect deferred maintenance to be more extensive than meets the eye. Get an inspection and budget for extra repairs and holding costs. Property neglect often begins long before the final foreclosure sale and hidden vandalism is a possibility. Check for current post foreclosure liens or fines and who will be responsible. Markets differ. You might be surprised. – Michael Daniels, Rentivity
7. Have A Good Attorney
The one thing you need to be successful in foreclosure investing is a really good, foreclosure attorney. In addition to the numerous “gotcha” issues that can come up in almost any foreclosure deal, several states have specific laws that impact investors when acquiring foreclosures. For example, Maryland has adopted a very aggressive “anti-investor” law aimed at foreclosure investors. A good attorney is key. – Sherman Ragland, The Realinvestors®️ Academy, LLC
8. Be Ready With Cash
Nearly all foreclosures have to be bought with cash. Most people don’t realize this, and there’s no financing contingency in most instances. You can then subsequently refinance the property immediately after closing and get a mortgage on it to pull some of your money off the table. You’ll also need to be able to close within a very short window without much time for due diligence. – Ari Rastegar, Rastegar Property Company
9. Be Open
Out of 10 foreclosure properties, more than half may have areas of concern that purchasers are not comfortable with. Be open to the fact that you may love a property that does not make financial sense for purchase. This is OK—it’s part of the process and it’s better to be aware in advance than purchase a property that does not have a market value similar to the purchase price. – Charles Argianas, Argianas & Associates, Inc.
10. Know What You Are Getting Into
Purchasing a property in foreclosure can be a great way to find a deal, but don’t ignore the “buyer beware” warning label. A foreclosure can quickly become a money pit. These neglected properties are usually in terrible shape, have major structural problems, unpermitted additions and may have severe health and safety issues. Know what you’re getting yourself into, and investigate the property before you buy. – Tara Hotchkis, Compass
11. Know When To Walk Away
Don’t get caught up in the bidding war frenzy with foreclosures. In a hot market, it is very hard to find a good deal on foreclosures, so you have to be patient and wait for the right moment. Often the best decision is to walk away and keep looking for a good deal rather than taking a deal you probably deep down know that you shouldn’t take. – Nick Ron, House Buyers of America
12. Help The Seller Out Before Foreclosure
If you’re able to, try to purchase a pre-foreclosure list and help the seller out before it gets to foreclosure. If you can keep them out of foreclosure and purchase the property, it can be a win-win for all parties involved. – Mike Hambright, FlipNerd.com
13. Remember That Foreclosure Doesn’t Always Mean Cheap
Investors hear the word “foreclosure” and they think cheap or a bargain. That is not always true. The bank that owns a foreclosure will have at least one (and many times multiple) appraisal done. They list the property at close to fair market value—not bargain basement prices. Foreclosure does not necessarily mean you’re getting a steal. – Erica Ramus, RAMUS Realty Group
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