What to Watch Out for When Buying a Foreclosure

The economy is improving overall and, as a result, some bright spots are showing up in the real-estate market. This “second wave” of foreclosures – combined with the fact that many people’s 401(k)s have bounced back with the stock market, and most economists agree that the bottom of the recession has hit – means that competition for these foreclosed homes is, in many cases, fierce. There’s a renewed, final dash to get in on what some perceive as the best real-estate deals they’ll get in awhile. But how do you know which foreclosure is a good buy, and which to walk by? Here are some tips to help guide you:
*Get it checked out by a pro. Perhaps the most essential point: Never go by looks alone as an indicator of whether a foreclosure is a good buy. A professional and experienced home inspector must be contracted to check out a property before making a deal on it, to determine what repairs need to be done — so they can truly assess whether it’s worth it for them. Don’t rely solely on previous inspections, even if relatively recent – a vacant home can deteriorate quite a bit in a short time, especially in an area with climate extremes.
*Don’t abandon common real-estate logic. Too many people, when shopping for a foreclosure, abandon their real-estate sense and focus on price alone. Remember, things like a sub-par location, poor light, terrible view, below-average school district, high local crime rate and other negatives might be part of the reason why a home went into foreclosure in the first place. Don’t assume that financial problems of the previous owner are the main reason for every foreclosure. The last owner may have bought the home ignoring some of the aforementioned problems, and seen value sink because of them.
*Skip – or, at least, very strongly rethink – the flip. “House-flipping,” i.e., buying at bargain-basement pricing, updating, then selling for much higher – is difficult.  Even if a house looks like an incredible flipping opportunity, beware of this temptation unless you are a pro, with incredible contractor connections. Automatically triple the amount you think you’ll be spending to fix up the home. Avoid the temptation to make fast money unless you think it through and talk to your real-estate professional, a home inspector, contractors, etc.  Remember to calculate your cost to purchase, hold, renovate, market and closing costs on both the purchase and sale.
*Go over the budget. A fixer-upper means nothing if you can’t afford to fix it up – and that’s especially true for foreclosures, where those fixes can cost a pretty penny. Before buying, make sure you have an ample budget to do all the repairs needed, after truly taking stock (with the help of a home inspector) of what those needs are.
*Do your homework on lenders. Good financing is still available to many qualified buyers. Just make sure, as with regular home buying, that you enlist a reputable lender. A good lender will take the time to do a review of your financial life and long- and short-term goals, to truly pick the best solution. Ask about hidden costs, rate locks, prepayment penalties, origination fees and whether underwriting is done in-house. Make sure everything is explained clearly.
*See it in person. Never buy a house without going in person to see it. Ever. Foreclosure or otherwise.

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