How to Open the Door on Foreclosures

We read less about foreclosures than we did a year ago, but they still roil our economy. While the shift in media attention  means little comfort to families losing their homes, the opportunity to buy a foreclosed property opens the door to homeownership  for others. If you fall in the latter group, count your blessings. And, as should be obvious (but rarely is, judging from the subprime mess): be careful.

For one thing, you are buying the property “as is”. Looks can be deceiving. Get a qualified property inspector so you know what you’re dealing with in terms of potential repairs and replacements. You can find a home inspector through the National Association of Home Inspectors. However, if you buy at a foreclosure auction, you won’t be able to peek inside before you sign on the dotted line.

Forget about warm fuzzies. If you think you’re the only one trying to make lemonade out of lemons, you’re fooling yourself. Competition is fierce. Recently there were around 300,000 foreclosures a month in the U.S. and some speculate that 9 million homes will go into foreclosure between 2009 and 2012. These homes will not be “staged.”

Every light and plumbing fixture, stair railing and heat pump could be taken, says Michael Fuller, vice president of sales and managing broker for RealEstate.com. Cabinets and cooper wiring could be gone, and bug or rodent infestation could be an issue.

“There may also be problems over the title to the home, compared to a regular sale, which may leave the buyer responsible for thousands of dollars in unexpected debts levied against the property that the previous homeowner didn’t take care of,” warns  Amir Korangy, publisher of The Real Deal. This means you need a solid lawyer. “It’s well worth the few hundred dollars in legal fees to know that everything is in order and that are no liens lurking,” says Fuller.

Keep in mind, says Fuller, that a lender won’t typically pay for any cosmetic issues, but may help offset structural repair costs either by offering credit at closing, or paying outright for work to be done. A bank also typically won’t purchase a home warranty for the buyer for a foreclosure property. However, you should invest in one yourself, says Fuller, to ensure that any replacement of major home systems, components or appliances is covered.

Don’t stretch beyond your means. “Remember, the principal and interest on a mortgage payment,are only the beginning of home-related costs. A general rule of thumb is to budget 1 percent of the home’s purchase price per year for upkeep,” explains Ethan Ewing, president of Bills.com.

Forget about a quick flip. You’ll likely have to wait out this economic downturn if you want to flip a property. Some estimates say the most successful investors in foreclosed properties get a 30-40 percent return on their investment, says Korangy- eventually, my dears.

“People are watching too much TV. One of the biggest hurdles I have is getting my clients to understand they are not going to live in a house they’re just going to prepare it for sale. Just because they like $50,000 cabinets doesn’t mean they increase the value of the house by $50,000. When flipping a house, get it in a salable condition only,” says Michael Clower, a broker specializing in foreclosures.

Lastly, think through whether this is really a good investment.  Probably, this means you should visit. “You’re buying more than the house. Is it on a busy corner, will there be street noise all night? Is it sandwiched between two liquor stores?” points out David Kerr, president of the Oakland Association of Realtors.

Foreclosures can be a bargain or boondoggle. The result mostly depends on you.

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