Stepping Up (or Down)

By Vicky Katz Whitaker

March 20, 2009 5 min read

STEPPING UP (OR DOWN)

Foreclosures can either be a blessing or a curse

Vicky Katz Whitaker

Creators News Service

Buying a foreclosed home may be the best step you've ever taken -- or the worst. The process is rife with hazards, from unanticipated fees and tax liens to hidden structural damages that can cost thousands to repair.

Still, the thought of getting a house or condo at a bargain basement price can be enough to get you in a buying mode.

Purchasing a foreclosure is ideal for someone with patience, said financial planner Rich Arzaga, chief executive of California-based Cornerstone Wealth Management. "Someone's pain may be a buyer's gain," he said.

Financing can be tricky, and there is an enormous drawback if you can't get full disclosure or inspect the property in advance of the sale. "People think they have the experience, the gut instinct to make it work," Arzaga said. However, this sometimes is not the case.

Alan Kipnis, a partner at the Florida-based law firm Arnstein & Lehr, urged would-be buyers to "do your homework before the sale." That means making sure the property is both livable and marketable. Also, determine if it's where you want to live. "In this market, if you purchase and make a mistake, chances are very slim that you can quickly re-sell," he said.

If you're purchasing a foreclosure as an investment, make certain it's in an area where properties are still selling or renting. "You'll need financial staying power to hold and market the property for at least 18 months if it cannot be sold or rented as you thought after you buy it," he added.

You also need to familiarize yourself with foreclosure auctions, where, Kipnis said, you need to be "prepared to pay the full amount of your bid on the day of the sale."

If you're just starting out, it's easy to get emotionally caught up in the process, paying beyond what you planned or can afford -- or even buying a worthless second mortgage, said Michigan Realtor Ralph R. Roberts, author of nearly a dozen tomes on real estate, including co-authoring "Foreclosure Investing for Dummies" ($22, Wiley), part of the popular reference book series.

"Many novices don't realize that when they're bidding at an auction, they're bidding on mortgages, not properties," he added.

By not understanding that the holder of the first mortgage usually gets first dibs on the proceeds, "they end up buying second mortgages for tens of thousands of dollars thinking they got a good deal when they actually bought a useless piece of paper," Roberts explained.

You have to do some serious research, and if you plan to do your own bidding, "set a top price you're willing to pay for a property and stick to it," he added. Bring someone with you to make sure you don't stray from that amount.

Finding a good deal on foreclosed property isn't that difficult if you continuously scan notices in newspapers and stay in contact with banks and real estate agents. Attorneys who specialize in foreclosure, bankruptcy and divorce are good sources too, since they often have clients that need to sell their homes and might be willing to accept an offer below market value.

"Generally speaking, the earlier in the process you can identify properties, the better," Roberts said. Finding a property in "pre-foreclosure" -- foreclosed property that has yet to be repossessed by the lender -- is usually best because you'll have less competition.

However, don't count on being able to inspect property before you buy it. "Sometimes you can knock on the door and the owner will let you in, but in foreclosures, homeowners are often feeling pain and anxiety which understandably turns into bitterness and anger," noted Roberts. "Don't be pushy. You can usually get a pretty good feel for how well a home has been maintained by walking around and inspecting the exterior -- all four sides."

It's wise to use the services of a professional home inspector, recommended professional real estate investor Christopher Yates, president of Denver-based CM Yates. However, buyers beware: Yates, who purchases 10 foreclosed homes a month, found that most need at least $10,000 to $25,000 worth of repairs.

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