BEFORE

AFTER

Should you buy a foreclosure?

Why you shouldn't...

• Instant equity doesn't necessarily come with the foreclosure
  
  Buyers generally feel that if they purchase a foreclosure they are receiving a home that is priced well below its value and equity will build instantly.  If you're purchasing a foreclosure in a slumping real estate market, however, the home may be valued accordingly.  Also, if more is owed than it is appraised for, the property could actually be overvalued.
  
  

• The general condition of the house could be poor
  
  Don't be fooled by exterior photos!  For that matter, don't be fooled by interior photos either!  Check out the property yourself or with a trusted real estate agent.  There are often issues with the plumbing or piping, and light fixtures and large appliances are often stripped from the home.  If the home wasn't "winterized" and it's January, be wary of its livability.  Plus, it will be your responsibility to get things running correctly again!
  
  

• You could have to fix things up in order to make the sale final
  
  Unless your a savey investor with skills or knowledge of the construction industry often times foreclosured homes can become money pits.  For the average person to purchase a home and then provide funds to renivate outside of his or her mortgage is a dounting and expensive task.  If you are not paying cash and you need financing, chances are, based on the current condition of the property, you will have to bring it up to code before your mortgage company will lend you the money to purchase.  Depending on individual city regulations, you may have to hire a general contractor (or complete the work yourself) to bring the property up to code prior to closing.  This could easily add onto the final purchase price, and suddenly, you're not receiving the great deal you once thought you were!
  
  

• It may not be good if there are many foreclosures in the area
  
  The primary reason for purchasing a foreclosure is the added value you receive after the purchase.  However, if your property lies in an area with a surplus of bank-owned homes, it will take longer for the home to rise in value.  Foreclosures drive down home values.
  
  

• Hassle, hassle, and more hassle!
  
  Extra forms, trips to the city offices, and a listing agent who couldn't care less about the foreclosure he or she is representing.  All of these add up to a surplus of hassles in addition to the normal stress that accompanies a home purchase.  If you're a person that becomes anxious easily, a bank-owned home may not be the best route!
  
  

• Your equity can disappear in the time it takes to rehab your home.
  
  Even if you get a property at what you think is a good value, you have to factor in all your costs.  It's not just labor and materials.  It's the time you hold the property before you can move in or sell it.  It could take months to fix up the property, and all that time you're paying mortgage interest, utilities, property tax, insurance and more.  You really have to do the math.
  
  Say you manage to pay $50,000 for a house worth $80,000.  You plan to put in $5,000 worth of carpet and paint, new windows and a new roof  $8,500  kitchen and bathroom cabinets $3,500, all of this before clearing a nice profit/equity.  Not so fast.  There's always more that needs to be done than you had expected, so you say the rehab actually costs you $17,000.  Closing costs add $5,000.  Then, say it takes you six months to fix the house and find a buyer if you intend to flip it or move in your self -- and each month your paying $1,000 in mortgage costs, taxes and insurance.
  
  Take a look at this example:
  
  
  

  The Cost
  Selling price, once fixed up:	$80,000
  Purchase price:	$50,000
  Gross profit/equity:	$30,000
  Expenses
  Closing Costs:	$5,000
  Rehab:	$17,000
  6 months of  PITI	$6,000
  Total expenses:	$28,000
  Net profit/equity:	$2,000

  
  That's a pretty slim profit/equity margin -- one that's completely wiped out if the previous owners trash the place.  Or if there are any unknown major defects, such as a severely cracked foundation or mold.  Or if it takes longer than you think to rehab the house in your free time.
  
  That's a lot of risk, and it could turn out even worse.  There are other ways to invest in real estate without exposing yourself to so much risk.
  
  
  What should you do...
  
  

• Learn the true Secret!
  
  The real value is in a home that has been recently renivated by an investor.  The investor has the advantage in that he can quickly evaluate the property.  Determine the cost of renivation, and has the ability to pay cash.  Cash is king in this market and by offering cash you can typically obtain a much lower price (especially for a Bank Foreclosure).  The investor also has an advantage in that he has workers that are eager and willing to work for less money than ever before.  In most cases the investor can buy a home, completely renivate the kitchen, bath, all new flooring, replace the roof, paint, all for less then what you could buy the same property for.
  
  

• Investors have the advantage 
  
  Chances are, out of the gate, the investor was able to purchase the property for less then you did.  Like I said before, cash is king and not only is the investor offering cash he might be buying more than one foreclosure from the bank.  The same property you bought for $50,000 the investor got for $40,000.  Doesn't seem fair but that's the way it is.
  
  

• Dealing with problems that come up
  
  Lets face it, problems always come up.  Your going along just fine and you find out the cabinets you ordered are the wrong size.  Since you don't have a commercial account with the cabinet company you have to take them back and exchange them.  Wait, you can't do that until next weekend when your not working.  The investor doesn't have that problem.  He makes a quick call and has the correct cabinets sent out or he sends one of his workers to exchange them.  My point is the investor fixes the problem immediately, you on the other hand have to wait a week and everything else you have planned gets pushed back.

• Purchasing Power
  
  Are you able to purchase the property for cash?  Do you have a low cost labor force thats willing and able to work 24/7?  Do you have commercial accounts to purchase material at a discount?  You probably don't.  The investor does.
  
  The good news is, during this market down turn, investors have to work twice as hard and are making a fraction of what they use to.
  
  There property must stand out from all the other properties in the area.  In order to attract a buyer, the property must be priced below market and it must be completely remodeled.
  
  

• Now is the time to buy
  
  Historically low interest rates (below 5%), tax credit up to $8,000.00, homes that have been completely restored better than new.  I can honestly say that there has NEVER been a better time to buy.
  
  

  Your Cost		Investors Cost
  Selling price, once fixed up:	$80,000	$80,000
  Purchase price:	$50,000	$40,000
  Gross profit/equity:	$30,000	$40,000
  Your Expenses		Investors Expense
  Closing Costs:	$5,000	$5,000
  Rehab:	$17,000	$10,000
  6 months of  PITI	$6,000	0.00
  Total expenses:	$28,000	$15,000
  Net profit/equity:	$2,000	$25,000

  
  
  

•  How do I find these properties
  
  

  I track homes that have been purchased less than 6 months ago and watch them come back on the market.   90% of these homes were bought by investors and have been renivated and placed back on the market for a quick sale.  Why would investors sell below market?  They need to recover there investment so they can repeat the process.  These homes go very quickly.  Educate yourself and become a savey home buyer by understanding your limits and understanding the value in a completely remodeled home with all the expenses under one mortgage.