Archives for June 2012

Are Foreclosures a Great Investment?

House in ForeclosureThere has been a lot of talk about investing in foreclosures over the last several years.  A lot of this talk is because foreclosed homes have increased dramatically around the country and many people think that there is easy profit in them.  The truth is that while a good deal may come available, there is a lot of risk in foreclosures, and only experienced investors should be purchasing them from the courthouse steps.

Before we begin, I want to clarify that this post only deals with foreclosures being bought AT AUCTION.  This does not deal with pre-foreclosures or OREO’s (foreclosed homes now owned by the lending institution).

Here are the 5 things that most consumers need to know about buying a foreclosure at auction (typically the courthouse steps)…

1. Buying foreclosed homes at auction requires all cash.

This rule alone will make foreclosure investing nearly impossible for most people.  In order to buy a foreclosed home at auction, you will need to pay the full amount of money (most likely a cashier’s check) on the spot, or within hours of the auction.  There is no mortgage process.  You either have the money or you don’t.

2. The previous owners have 30-days to redeem the house.

In New Mexico, there is a 30-day redemption period on foreclosed homes after auction.  This means that if the previous owner is able to come up with the money to buy the house back, they have the right to do it within 30 days after the auction.  The investor who bought the home would get all of their purchase money back, but they would not be reimbursed for any work done on the property.  Therefore, the general rule of thumb is to not do any work on the house within 30 days of buying it at auction, or you risk losing anything you changed.

3. There is no guarantee on a clear title to the property.

When an investor buys a house on the courthouse steps, they are issued a “Special Master’s Deed”.  This is a very basic deed which doesn’t guarantee clear title to the property.  So while many liens are usually wiped out in a foreclosure sale, some liens could still exist and remain attached to the property.  If the buyers aren’t aware of these liens, they could be in for an expensive surprise.  Therefore, foreclosures can be very risky if the proper title research is not done.

Also, since many foreclosed homes are pulled off the auction track at the last minute, it can be costly to pay for title work on every house.  For this reason, many investors often do their own title work.  Yet another reason why foreclosures are usually bought by experienced investors and not the general public.

4. Foreclosed homes are often bought without a proper inspection

Rarely does a buyer of a foreclosed home get the chance to do a proper inspection of the property.  In fact, most of them are not even able to see the inside of the house until after they have bought it.  The reason is because few default owners allow prospective buyers to snoop around their house while they are in the process of foreclosure.  And by the way, don’t expect someone who is being foreclosed on to leave the place in good condition.

5. Foreclosures can often require eviction lawsuits

Many foreclosed homes are still occupied by the default home owners after the auction.  Often the new buyers of the house must evict the previous homeowners.  This requires more money, time, and knowledge of the law.  Let’s not forget the amount of damage that the previous homeowners may do on their way out.

Conclusion

I want to make it quite clear that foreclosed homes are usually only bought by experienced investors due to the riskiness of their nature… all cash purchase, little to no inspections, and possible title conflicts.  Regular home owners should tread very lightly in this area.  If not, they can stand to lose a lot of money from not being prepared.  This is contrary to what many “get-rich-quick-books” will tell you, but it is something that you need to know.

Photo Credit: “Sign of the Times – Foreclosure” by JefferyTurner on Flickr.  CC Licensed.