Buying a Bank-Owned Foreclosed House? Here are 7 Mistakes to Avoid
Buying a foreclosed house can be a profitable investment. After refurbishing the house, you can sell it at a profit or rent it out and earn regular income. In today’s market, there are plenty of opportunities to buy a foreclosed home. However, there are also potential landmines to avoid. A wrong purchase can spell disaster to your bank account and credit. This is especially true if you have financed your purchase with a hard money loan.
Here are some mistakes you should avoid when buying a bank-owned foreclosure:
Mistake #1: Considering all foreclosed homes as a good investment opportunity.
With the number of bank-owned foreclosed properties available in the market, you need to be wise in choosing your purchase. The truth is, as with used cars, there are also potential lemons in the real estate business. There will usually be disgruntled ex-homeowners involved. They may trash the house and do significant (but not noticeable) damage as a way of getting even with the bank. On the other hand, the bank’s concern is not the condition of the house. Their concern is to unload inventory and recover their investment. Make sure you do a thorough check or inspection on the house before you buy. Ask whether the house has been empty for an extended period or if the house has been winterized. Check the condition of vulnerable areas – the ceilings, the posts and load-bearing walls.
Mistake #2: Not checking all the legal implications of the purchase.
Legal ownership entails not just rights but also responsibilities. When you own the property, you may also inherit its debts. Check with the title company to ensure that all real estate taxes are paid and that there are no outstanding debts on the property. Otherwise, you may be faced with these financial obligations on top of what you already paid for the property.
Mistake #3: Falling in love with the property.
The real estate game is not for one who is easily swayed by emotions. Yes, the property is a dream, but can you afford it? Or are you biting off more than you can chew? Having an emotional attachment to the property may also result in you being blind to the problems and issues that are attached to the property. You may also tend to overbid just because you want the house too much.
Mistake #4: Failing to be in it for the long haul.
Investing in real estate is not for those who want to make a quick buck off the purchase of the foreclosed property. Making this a profitable venture will more often than not mean that you will do some work and spend money for any repairs and renovations to make the house ready for resale or to rent. Also, be prepared to invest a considerable chunk of your funds, funds that may be tied down to the property in the event that you are not able to unload the property as quickly as you would like.
Mistake #5: Making the purchase on an as-is, no inspection basis.
Do your homework and perform a personal inspection of the home, preferably with a professional home inspector. Often, people would like to skip this step, thinking that this is just an added expense. However, the home inspector will point out any existing and potential structural problems, such as an outdated and faulty wiring system or the existing cracks in the foundation. At the very least, this can help you negotiate a better price.
Mistake #6: Not securing a clear title or owner’s title insurance.
Before you sign the papers, ensure that there is a clear title. The seller has the legal right to make the sale of the property. If this is not available, demand that there be a clear-title contingency in the purchase contract, where problems with the title will mean that the deal is off. Another way to protect this investment is to get owner’s title insurance, which covers you against unexpected claims and liens (known as clouds) on the property. However, it is best to have a clear title from the onset, so that you will have no unnecessary delays in your purchase and subsequent sale. Remember, time is money!
Mistake #7: Not having enough funds.
Aside from the purchase price, there will be additional costs such as closing costs, unpaid taxes, legal fees or outstanding utility bills. Also, you may also need to shell out some funds for repairs. This is when you may need to work with a hard money lender.