August 24, 2012

Buying a Foreclosed Investment Property? Watch Out for These Problem Areas

Whether you’re new to investment properties or you’re
looking to add another property to your portfolio, you’ve likely considered
buying up foreclosure properties. Given the
difficult economic climate, a lot of homeowners are forced to walk away from their
properties, leaving the bank to try to reclaim lost money through foreclosure

Buying one of these properties comes with a number of
opportunities, but there are also plenty of challenges and potential pitfalls
that could hurt your investment portfolio - especially if you’re also investing
in a Michigan property manager to handle your rental units for you.

Buying a Foreclosure is an Impersonal Experience

When you purchase a foreclosure in Farmington Hills, you’re not
dealing directly with a homeowner. You’re
dealing with a faceless financial institution.
The bank wants the asset off their books. They don’t see it as a home, or your home, or
a rental property.

Dealing with a bank means waiting long periods for
replies. There’s no opportunity for
introductions, passing notes, sharing stories over coffee, etc. The agent for the bank likely won’t even show
the contract. They simply input the data
and the asset manager looks at the bottom line.
It’s a numbers game for the bank.

Expect Nothing in the Way of Disclosure

REO properties, or foreclosures, are “real estate owned”. This means that the bank owns it after it
goes through the complete foreclosure process.

With this type of sale, there’s no disclosure. That means you have no knowledge of the
experience the previous owner had.
Without that information you’re going in blindly. This required due diligence where you do your
own research to find out some information on the property before investing your
money. Buy the wrong house and you
cripple the profit potential of your portfolio.
Not even the best property management company in the world can put good tenants
in the wrong home.

Prepare to See Gutted Homes

Not all homeowners are bad, or malicious. Some tried desperately to push a short sale
through before they lost their home and had to walk away. Some however take the steps to gut a home of
all appliances and fixtures - including copper plumbing - right before they

They’re either hurt, vindictive and out for revenge or they’re
trying to recoup some of the costs. In
many cases, homeowners just have hard feelings toward the bank so they feel
justified in damaging the property. It
doesn’t really hurt the bank, but more the value of the home. As a result, it lands on you as a
responsibility to fix if you buy the property.

Don’t Expect the Bank to Fix Anything

Your offer and the already discounted listing price should
already account for the risk associated with buying an “as is” property for
investment purposes. As a buyer, your
contract permits an inspection, so you’ll be able to find out a great deal
about the property, and you’ll want to review it prior to making an offer.

Just don’t ask the bank to fix issues in the home. The odds are slim to none that you’ll get
credits or items repaired on a foreclosure.

Ultimately, there are a lot of tempting deals out in the
market right now. If you’re considering
the purchase of another property, remember to look at other options as
well. That price tag on the outside
might be tempting but once you dig into the structure of the home you’ll likely
see that the investment will require more in the long-run that you may not be
able to afford.

Topics: investment tips, property management tips, real estate investment tips, rental property investing