Whereas wholesaling may be a perfect area for real estate investment novices to begin a new venture, investing in foreclosures tends to be a much riskier venture and probably not for the beginner. While the prospective profits from foreclosures can be enticing, the downside can be downright scary to the unprepared.
Purchasing Foreclosures
Foreclosures can be acquired by buying…
- PRE-FORECLOSURE (Purchased before the auction)
- AT THE FORECLOSURE AUCTION (If you bid is the highest, you own the property)
- FROM THE LENDER AFTER FORECLOSURE (REO or Real Estate Owned)
Risks in Foreclosures
The least risky method of foreclosure purchase is buying REO properties. Here most of the dirty work is done and although you may not receive a full disclosure statement as you would with a regular real estate transaction, it is still most often a relatively safe transaction.
Buying pre-foreclosure takes on a new schedule of risks. There may, for example, be tax liens, unpaid property taxes, unpaid utility bills and much more. You also will not know the condition of the home since it will likely still be occupied. And finally, you may have to deal with eviction. Lastly, you may have to deal with the bankruptcy of the owner.
The most risky foreclosure transactions tend to be those involving an auction purchase. These are typically “cash sales” and after a successful bid, you may have as little as a week to come up with the cash. If you cannot raise the money, you will lose your deposit.
You normally cannot have any type of inspection of the property performed and if the property is occupied, you may well become involved in an eviction. Many states have very strict laws which deal with foreclosure and you will be limited as to what you can do to make your transaction more secure. You will need to research the foreclosure laws in your state.