This Old House

The pros and cons of buying foreclosures and short sale properties

It’s news to no one that national foreclosure filings—including default notices, auction sale notices, and bank repossessions—are on the rise. Such activity jumped 9% during the first six months of 2009, compared with the previous six months, according to RealtyTrac. One in every 84 U.S. housing units received a foreclosure filing during the first six months of 2009. Those statistics, though harrowing for struggling homeowners, spell opportunity for prospective buyers. During much of last summer, nearly a third of homes sold in the U.S. were “distressed” properties. “Because so few homes are selling right now, in some cases, property can be picked up for less than 30 cents on the dollar [compared with the previous sales price],” says Michelle Francis, an agent with Tim Francis Realty in Atlanta.

Compelling as they may sound, foreclosures and short sales can present unique challenges. Francis recommends steering clear of geographic areas fraught with foreclosures. “If you look down the street and half of the homes are in foreclosure, it’s probably not a good place to buy,” she cautions. In Atlanta, for example, Francis says investors should stay away from the condo and townhome market, both of which were overbuilt during the housing boom. “It will be a long time before those markets recover,” she says, noting that a buy-and-rent strategy (for someone looking to generate income from a rental property) may not always work in such cases. “Many times, in these developments, rentals are only allowed for 25% of the total units. You could end up on a multiple-year waiting list before you can rent out your property.”

Certified distressed property expert George Durkin, a broker-manager with Las Vegas-based Realty Executives, says real estate investors who do their homework—and don’t try to time the market by looking for the perfect moment to buy—will have the best chance at success.

Rule No. 1 when buying a distressed property, Durkin says, is to ask the sellers for a due diligence period of seven days or more after making an offer. “Hire a professional home inspector, plus specialized inspectors to handle the roof, mold, pests, and other inspections to make sure the property doesn’t need any major repairs.” Why? Because you can’t be sure of the circumstances behind the former resident’s exodus. Also, foreclosures and short sales are typically sold as is and without warranties.

Figuring out exactly what you’ll pay in one of these nontraditional real estate deals is another challenge. Durkin advises buyers to work with their real estate agents to fully understand any counteroffers provided by the lenders, particularly in the case of a repo sale. “Many of these contracts are worded in ways that have the buyer paying for costs (such as property transfer taxes and other fees that the seller normally covers). That may not seem obvious at first glance,” Durkin warns. “Careful attention should be paid to what closing costs are going to be paid and timelines associated with the transaction closing.”

As with any type of investment, it’s best to speak with a financial planner, accountant, or other professionals before jumping into the distressed real estate market, especially if this is your first time. Go into the market with a long-term view. Flipping properties for a quick profit is a thing of the past. Poteat, who has been living in his new home since February, advises anyone looking to purchase a distressed property to line up a good real estate agent and reputable mortgage lender. “With short sales and foreclosures you’re going to deal with more headaches than you would with a traditional deal,” he explains. “You want people on your side that will go to bat for you and help you win.”

The Do’s and Don’ts of Buying Distressed Properties
DO
work with a real estate agent who has experience with distressed property sales.

DON’T buy property in a neighborhood that has foreclosure signs in almost every yard.

DO look for homes that have already been vacated.

DON’T be drawn in by super-low prices; the cheapest properties may present the greatest challenges.

DO – immediately after you make an offer – hire multiple inspectors to thoroughly assess the home.

This article originally appeared in the October 2009 issue of Black Enteprise magazine.

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