For new investors, foreclosures can be risky. There are two major concerns:
1. Problems with the title. Perhaps the single most important part of the process is the title search. Have an experienced title search professional or real estate lawyer conduct the search for you. This is an extremely worthwhile investment. Buy a property with a cloudy title, and you could be in for big problems. After all, when homeowners can't pay the mortgage and know they're losing their home, they usually stop paying all the other bills too, and so it's likely there's a whole line of lien holders that can make a claim. Also, make sure it is the primary lien holder who is doing the foreclosing. If not, you will probably still be liable for that loan if you buy the property.
2. Maintenance and structural issues. Foreclosures are notoriously high-maintenance. Assume you're getting a fixer-upper. If the homeowner couldn't afford the mortgage, it's likely that he couldn't afford upkeep and repairs, either. These homes are often neglected -- and, in some case, they've been deliberately trashed. It's a good idea to have a home inspector or professional contractor give the home a thorough evaluation.
A few more tips
- Be selective. Skip neighborhoods with lots of foreclosures. It is usually a sign that the neighborhood as a whole will take time to recover from this downturn. Instead, look for a neighborhood with only one foreclosure -- and then scoop it up. Target areas that are doing well (or at least not so bad) overall, and have a good chance of riding out this economic storm fairly well. Places like Detroit, for example, involve a higher risk because of their unemployment problems and other economic challenges.
- Don't get cute. Avoid risky or "creative" financing techniques, at least at first. Until you get a few successful investments under your belt, play it safe. New investors often underestimate the time it will take to fix up and sell a property, which could mean big trouble if you've used a hard money lender or other time-sensitive means of financing. Interest rates are still pretty low, so if you can qualify for a fixed-rate mortgage at a decent rate, that's probably your best bet.
- Get a pro. In order to protect distressed homeowners from scam artists, many states have recently enacted new laws involving foreclosures and the transfer of these properties. Your local county clerk's office (or a real estate attorney) can probably fill you in on the latest legal changes regarding foreclosures. To get some quick info, do an online search using your state and "foreclosure" along with "laws" or "legislation." Unless you consider yourself a real expert in foreclosures, hire an experienced real estate attorney to oversee the deal from contract through closing. This is no place for amateurs.