Home foreclosures a good idea?

Foreclosed homes not always what they seem to be

There have been lots of books, seminars, and television advertisements touting the benefits of purchasing foreclosed homes. The ads state that such homes can often be purchased for pennies on the dollar and the seminars advertise that you can become wealthy by purchasing foreclosures. Is there any truth to these claims? Can you save and/or make money buying properties that the owners have been forced to give up?

A foreclosed home is one which, for whatever reason, the lender has been forced to take back from the buyer. More often than not, the reason is that the buyer has failed to make timely payments on the mortgage. There could be other reasons as well, such as a tax lien that has not been paid. Whatever the reason, the lenders who take a house back from the buyer generally do not want it; they want the money that the house represents. After all, if lenders wanted to be in the housing business, they would build houses in the first place.

Foreclosed houses are usually sold at auction, and the folks that run ads on television would have you believe that these houses can be had for a pittance. Once you buy a house this way, they point out, you can resell it at a profit, or rent it out as you repeat the process and build a small real estate empire.

The truth isn’t nearly that glamorous; here are some reasons why buying a foreclosure may not be all that good an idea:

• Auctions are quite competitive - You are not the only person with the idea of picking up a bargain. If the house is in a good neighborhood and in good condition, it will sell for close to, if not as much as, market price.
• Pay right away - When you buy a house in an auction, you will be expected to pay in full at the time of the auction. If you don’t have a six figure balance in your checking account or fast access to such funds, you will not be able to buy.
• Distressed property - Many such homes have been subjected to damage by owners or by lack of attention. You might be looking at spending thousands on new paint, structural repair, carpet or appliances.
• Existing liens - Houses which are taken from their buyers may have existing tax liens or home equity loans. If you buy them, you will be expected to make good on these debts. They come with the house.
• Title problems - More than a few foreclosures have title problems, and obtaining a clear title to the property may be difficult, if not impossible.

People who regularly invest in foreclosed houses spend a tremendous amount of time doing research. The time spent tracking down possible title problems and lien problems can be a full time job. If you do not have the time to spend on such research, then you should probably buy other property.

Buying a home that has been taken back by the lender is not for everyone. While there are bargains to be had from time to time, there are also tremendous risks involved for the buyers. Unless you are willing to take the chance of having to spend a lot of money down the line to make good on liens or repairs, you might be better off leaving the distressed property to the people who run the ads on TV.