Buying Foreclosed Real Estate – Reality vs. Reality TV
You’ve probably seen one or more of the many television reality shows about buying real estate. You might be thinking that buying foreclosed real estate is a great way to get your first home. And while you should consider foreclosures when looking, there are some things you should know before you venture out with your checkbook.
Reality or Not?
The programs you see on television usually show buyers who make great deals. They endure some kinds of trials during renovation, but come away making a pile of money. They will sometimes even summarize the financial aspects of the transaction.
What you need to remember is that these are reality shows, which are designed to be entertaining more than informative. Usually, the credits will include disclaimers in fine print. Which means that what you saw probably wasn’t the whole story, or it’s been embellished to be more captivating.
Be wary of the raw numbers tossed about that make it appear there are huge profits. As an example, suppose a property has a purchase price of $200,000 and is re-sold for $250,000. They’d lead you to believe there was a tidy $50,000 profit. Not so. To the purchase price is added the cost of acquisition, holding, and renovation. Typically this would amount to $20,000 to $30,000. Then there’s the selling costs. From the sales price is deducted the costs of sale, typically 8% of the sales price. In the example, that amounts to $20,000. So simple math reveals the truth: This gross profit of $50,000 nets out to less than $10,000, and perhaps even zero.
What to Look For in Foreclosures
While the potential profits are much lower than what you may have expected after watching the television dramatizations, you can still get a good value in foreclosed property. The key is knowing what to look for and obtaining advice from real estate, title, and contractor professionals to guide your purchase.
Most foreclosed property is in need of repair (distressed) to some degree. Be sure to have a professional inspection completed to evaluate the property and point out all defects. Unless you are a seasoned real estate investor or professional, find a reputable realtor to guide the paperwork of the sale. And when obtaining estimates for repairs, be sure to get more than one bid by a licensed contractor.
Where To Find Foreclosures
While there are fewer foreclosures now than at the peak of the real estate meltdown, there are still many out there in almost every major city nationwide. The three primary sources of foreclosures are courthouse foreclosure auctions, auctions by large real estate liquidation companies, and those listed on the local multiple listing services (MLS).
Foreclosures at the courthouse can sometimes offer the greatest value. But you must have all the cash ready to close immediately, there is little time for inspection, and there is no guarantee as to title.
Real estate auction houses specialize in nothing but home auctions. Typically the properties are listed on their website, and there is a specified date on which the property will sell. You have time to do your inspections and research (due diligence) and then submit the bid or bids you’re comfortable with. The highest bid at the stated end time is awarded the property, providing the reserve price is met. The reserve price is the minimum the bank is willing to accept for the property. Good values can be had through auction houses, but you’ll need to be patient. You may have to bid on several before winning an auction.
Traditional real estate listings through real estate agents also have foreclosure listings. While this source will take the longest time to complete, it’s probably also the safest, with ample time for due diligence and the guidance of the real estate professional close at hand.
Foreclosed Real Estate Success
You can still find great real estate values in foreclosed real estate. With patience, some self-education, and professional guidance, it’s possible to find yourself the owner of quality real estate and have built-in equity right from the day of closing.