Buying a Foreclosed Home

More and more people are using the Internet (Google real estate, Zillow, Trulia, Realtor.com, etc. to name a few online real estate resources) in search of "buying a foreclosed home".

As the U.S. housing market bottom gets closer, this real estate search phrase will become even more popular. A growing number of people will be trying to figure out how to buy a foreclosed home at the housing bottom, renting the home for a period of time for cash flow while waiting on future appreciation, and then selling high to cash in on real estate riches.

Definitely a proven strategy, but, having worked on over 50 personal real estate investment transactions, I'm going to make a few suggestions that will hopefully offer a beginning real estate investor or a first time homebuyer some beneficial insight into achieving the financial rewards they are looking for when they're trying to figure out how to buy a foreclosed home. Before doing so, let's take a look at the foreclosure process and what's generally involved in buying a foreclosed home.

Once a homeowner has gone delinquent in making payments on their mortgage loan, they will receive a NOD (notice of default) and are given a period of time to bring their mortgage loan current. From state to state, the foreclosure process will vary, but, ultimately, a home will be foreclosed on by the bank / lending institution if the owner doesn't make their mortgage payment and can't get caught up with their mortgage loan in the allotted time given to them.

Once this period of time has expired and the homeowner has not made the delinquent mortgage loan payments (or structured any other loan modification or mortgage loan agreement with the lender), the house is actually foreclosed on and is put up for sale at the public trustee auction (more generally known as the city or county courthouse steps).

At that point, anyone has the ability to bid on the foreclosed home. If you bid on the foreclosure and are awarded the winning bid, you typically have to be ready to buy the foreclosed home immediately with cash or certified funds or make a nonrefundable deposit giving you 24 hours to pay cash for the full purchase price of the foreclosed property.

Unfortunately, most inexperienced homebuyers or real estate investors don't realize that buying a foreclosure or cheap home is not very difficult as clearly evident by the actual foreclosure buying process I described above. Once they realize how easy it is (in terms of process), many homebuyers feel like they can jump in feet first. And, if you're financially ready, you should, but buyer beware as the rest of the process is where the dangers and difficulties can, and often do, arise when you're considering buying a foreclosed home.

Did you ensure that when you were bidding on the foreclosed home, you weren't buying it with an obligation to pay an outstanding second mortgage loan or home equity line of credit (HELOC) secured against the property? Typically, this doesn't happen and in theory, it's not supposed to happen, but there are horror stories where the real estate investor didn't realize what they were buying. In fact, it's become enough of an issue that my real estate investment company now works together with a title officer to obtain what's known as a "hold open" title policy to ensure that title is indeed clear and there are no other mortgage loans or financial liens against the property before we finalize the purchase of a winning bid on a foreclosure at the public trustee auction.

Secondly, did you have a chance to look at the inside of the foreclosure you want to bid on? Do the owners or tenants still live in the foreclosed home? If they do, will you have to evict them or did you budget to pay them some form of compensation to help them move and to do so without doing any damage to the home before they relocate? If you have to evict them, how long is the eviction process in the state you're buying the foreclosure in? If the occupants are no longer in the home, did they trash the house before they left or cause any other damage (like pouring cement in the toilets) that you're not aware of, but could cost thousands if not tens of thousands (outside of your planned rehab budget) to repair? How about the foundation? Do you have enough expertise to be able to walk the property to ensure that no structural foundation cracks exist (another easy to miss issue that could cost you thousands extra on your rehab budget)? Do you have a home inspector who can evaluate these issues at a moments notice when a viable foreclosure is put up for auction and you only have a few hours to assess whether or not this is the right foreclosure to buy?

These are just some of the things you need to take into serious consideration before you think you're ready to buy a foreclosed home.

I love real estate, but I can tell you that it is a lot of hard work and there are many headaches associated with a property even when you've executed the process to what you would consider perfection. I'm not making this comment to discourage you from real estate investing or buying a cheap foreclosure for a personal residence where you're looking to do some rehab work to build some sweat equity.

You don't have to Google real estate to know that it is a tried and true investment strategy and has the ability to amass wealth like few other investment vehicles. Just remember that it is important to surround yourself with a team of real estate experts who you can trust to advise you throughout the process. Don't wear "doing it all yourself" and "thinking you know it all yourself" as badges of courage. It will cost you dearly! Again, let me reiterate, the best thing you can do is surround yourself with real estate experts that know more than you and are willing to collaborate with you on your foreclosure project. Their advice on the specific property, the property value, the surrounding neighborhood, contractors, and insight into any other resource you may need in flipping the home could prove to be invaluable!

So, again, before you worry about trying to buy a foreclosure (or any cheap home for that matter), worry about getting your system setup first - even if you only plan on buying one cheap foreclosure. Yes, you do make money when you buy at the right price, but buying at a great price does not guarantee success in cashing in on the financial rewards of buying low and selling high. In fact, no matter how good you buy a property, it will be all for not if you can't execute your plan (unless you get lucky). If you're okay with taking this chance without having a plan and a team of real estate experts in place, then don't waste your time buying a cheap foreclosed home. Head to the casino and roll the dice. It's headache free, more exciting, and will offer you the same odds! In fact, when it's all said and done, the casino may offer you better odds if you only think about how to buy a foreclosure and not the rest that comes along with taking on such an endeavor!