Few investments are more alluring these days than below-market-value real estate. And buying a home in foreclosure seems to offer just that opportunity. As housing prices skyrocket in many markets while the economy remains weak, more high-end foreclosed homes are available in some regions of the country. But a word of caution: Purchasing one is a lot more difficult than you might think, and even if you do score, a foreclosed home isn't necessarily the good deal it seems.
No question that as an investment, foreclosed residential real estate can look attractive. "People like buying at foreclosure because they feel like there's a possibility that they can increase the value of the home very quickly," says Elaine Zimmerman, president of the Web site ForeclosuresUS, which offers free, national foreclosure listings that are updated weekly.
She notes an increase this year in high-end listings in good neighborhoods as well as traffic to the site. "A lot of people are discouraged with the stock market and see real estate as a much safer investment because they control it," she says. "A reasonably intelligent person can ascertain if a house is in a good area and a good value."
ADDED TRAUMA. Fair enough. But the process has numerous drawbacks, which make it unsuitable for most people. "It's just too difficult, too time-consuming, and there are too many snakes in the grass," says Richard Russell, president of New York mortgage brokerage Richland Equity Resources. "Buying a home and getting financing can be traumatic as it is," he says. "Buying a foreclosure adds to the trauma."
Typically, clients call him hoping to jump into a foreclosure. When they realize what's involved, "before you know it, they decide not to do it," says Russell.
The initial problem with foreclosures is that so few are available, especially in good neighborhoods. What you're really looking for is a bad house in a good neighborhood, says Zimmerman -- not a good house in a bad area. Depending on where you live, you might wait years for something decent in a neighborhood you like to crop up.
LIEN ON ME. Many Web sites offer foreclosure listings for a fee or use the listings as a come-on for sales of courses and books (Zimmerman also offers courses on her site). Make the mistake of entering your e-mail address in exchange for free listings on some Web sites, and you'll be inundated with spam e-mail daily (as I am now).
Keep in mind that the best properties spark hot competition, mostly among real estate professionals who are experts at snapping up foreclosed properties quickly. Many actually buy the best homes before they've been foreclosed on, checking the courts daily for homes that are just going into the foreclosure process and then contacting the owner directly and offering to buy the house for cash.
That's certainly not for everyone and has extra risks, since the property may have liens against it (for unpaid taxes or fees owed to contractors) that you don't know about, and which you, as the buyer, would be responsible for.
KNOWING THE ROPES. Buying a home after foreclosure from the federal government or from a bank is a more sanitized process. But since it requires knowhow, courses abound that can walk you through the various processes.
For example, buying a foreclosed home from the Housing & Urban Development Dept. requires submitting a bid. You may need to get proof of financing up-front, which sometimes can be tricky for a foreclosure. But if you buy from a bank, you can call the "REO" (for "real estate owned") department and get a list and buy directly. That's often the way to find the best homes, says Zimmerman.
Assume that property will be sold "as-is"
Since people who lose their home to foreclosure were probably running out of money for about a year before that, you can safely assume that the home hasn't been well-maintained. Often, the power is off when you get a chance to tour it.
With homes more than 10 years old, Zimmerman advises buyers to assume that all the major appliances and heating and cooling systems will need repair or replacement when making a bid. Most homes are sold "as-is," and to ask for repairs is to risk losing the bid.
LEAVE IT TO PROS. Finally, say you manage to buy a foreclosed home, your work is often just beginning. Zimmerman says the people who make the most money on foreclosures do it over and over, putting together a small team of contractors who can go in and paint and repair a home quickly and inexpensively. "I've bought a lot of houses this way and done really well with it," she says.
Overall, buying foreclosed property seems best left to people, like Zimmerman, who are involved in the real estate field and who can invest the time and energy to learn the process because they plan on doing it repeatedly. If you're just looking for a good deal on a home, you may well stumble across a foreclosed property in the real estate listings, where plenty of other below-market fixer-uppers are often available as well. Zimmerman says getting to know a real estate agent who specializes in foreclosed properties, and owns a few, is often a good way to get a deal.
Russell thinks the direct method is the best approach to getting a bargain in real estate. Identify a neighborhood you like, talk to residents, and see if anyone might want to sell. He says in today's hot real estate markets, you might find older residents for whom even a below-market price would be a windfall. Also, they might be happy to sell directly to avoid the hassle of hiring -- and paying a commission to -- a realtor and sprucing up their home for sale.
"People think that buying in foreclosure is a shortcut to finding the best deal, and it's not," says Russell. "Real estate is a people business. You have to get out there and meet people to find a good deal." With foreclosed real estate, just like any other investment, the same rule applies: If it seems like it's too good a deal to be true, it probably is. By Amey Stone in New York