Foreclosure Investments: Tips and Traps

Buying foreclosed homes can be a profitable investment, especially if done properly. Since the goal of investors is to buy repossessed homes that are far below the current market value, their investments already receives significant equity once they have closed a deal. Because there are certain risks involved in investing money on homes in foreclosure, it is best to understand the foreclosure process and avoid some of the common pitfalls. Here are several tips in avoiding foreclosure investment traps.

Don't Always Assume It's a Bargain

Contrary to popular belief, not all properties in foreclosure listings are sure bargains. Sometimes, banks and other financial institutions price the foreclosed homes based on several factors, such as outstanding loans on the property. If an investor purchases the repossessed home close to the value of the property, he or she will have no equity during closing.

Contact the Banks Directly

Not all foreclosed homes are listed publicly. Be aware that some financial institutions do not include REO listings because there are usually only a few foreclosure actions to maintain their own REO department. Because of this, it is wise to contact these banks directly and inquire about possible foreclosures around the area. By doing so, you can get lucky and be the first to negotiate with the lender even before the property is advertised publicly.

Be Sure You Do Not Overbid

Home auction companies usually require a fixed minimum bid, which is near the appraised value of the property. Sadly, anxious first-time buyers and investors get caught up in the excitement of bidding on a foreclosed home and overbid on a property. So instead of receiving significant discounts, they end up paying more for their investment.

Save More Money with Municipalities

Municipalities also offer foreclosure auctions, which can be a profitable real estate opportunity for investors. This is because most repossessed homes are sold to clear liens and back taxes. Meaning, a $300,000 can be purchased for half its price. On the downside, the winning bidder should be able to pay for the purchase within a day or two and without any kind of financing arrangements.

Do Your Research Ahead of Time

Most of the time, the goal of investors, realtors and general home buyers is to benefit from the sale of a repossessed home at below market value whether to use as a residential property, rental place or resell for larger ROI. As such, it is important that you perform thorough research, negotiate properly and close a great deal before signing a contract to purchase a home in foreclosure. Whatever your reason for foreclosure investing, adding extra effort and time for your research could yield significant rewards.