Foreclosed property investing involves risk

Investors should be careful when considering buying foreclosed property

If you watch late nigh television, you will frequently see advertisements for seminars, books and “systems” that tell you how you can get rich in real estate. The ads usually feature some young, attractive people who ostensibly made millions and quit their day jobs all because they found out the “secrets” of buying real estate for next to nothing. Often, these deals involve buying foreclosed property, and while some money can be made that way, it’s riskier than you might think.

With rising interest rates, sales of homes are leveling off. Worse, homeowners who took out low-interest adjustable rate mortgages just three years ago are now facing huge increases in their house payments. With those increases come an increase in the number of people who cannot pay their monthly house payment. And with that comes foreclosures. The numbers vary, but it appears that across the nation, foreclosure rates are significantly higher than they were a year ago. In some places, as much as 70% higher. People can’t afford the homes anymore, and their lenders are taking back the property.

This might seem like a great time to buy; lenders often just want their money and some of these properties have significant equity. All you have to do is buy the house at auction, pay off the lender, and sell the house for a quick profit. Right? Unfortunately, it’s not that easy, and the list of things that can potentially go wrong is a long one.

Here are a few things you should watch out for when considering the purchase of foreclosed property:

• Watch out for liens - This is the big one. Most people automatically assume that the foreclosure is for a first mortgage. That’s not necessarily the case. You may find that the owner has defaulted on a second mortgage, and once you buy the property, you are now liable for the first one! That can eat up your profits in a hurry. Watch out for other liens, such as tax liens, too. The best way to minimize this problem is to hire an attorney to do a title and lien search. It’s worth the money.
• Check the address - Many buyers have discovered that the nice property they thought they were buying at 123 Main Street was actually a hovel on 123 Main Avenue. These mistakes happen more often than anyone would like to admit, but if you buy the property, it’s yours.
• Disputes from the existing owner - Just because the courts say the foreclosure is a done deal doesn’t mean that’s actually the case. In some states, the owner of the property can contest the foreclosure in court. This can tie up your ability to take over the property for months or even years, even if you have already paid in full for it. Sometimes, this can’t be avoided, but you should at least be aware that this problem exists.
• The owner that won’t leave - In some cases, you may have to call the local authorities and have them forcibly evicted. This can cost money.
• Damage by the owner - Sometimes, out of spite, they’ll just tear the place up. If so, you can sue, but how much are you going to get from someone who just walked away from their house?

There is money to be made in foreclosed property, but it’s not easy, and it’s not for amateurs. Be careful.