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Buying Foreclosed Properties: What to Consider

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With the recent bursting of the real estate bubble, finding short sale and foreclosed properties is easier than ever. While it makes good financial sense to purchase a home with instant equity, there are some caveats to buying a foreclosure. Learn how to maximize profits and minimize risk with these quick tips for finding and buying the best foreclosed properties.

Tips to Buying Foreclosed Properties

  • Work with an agent. Most banks and government agencies work with a few select real estate agents when listing their foreclosed properties. Take time to introduce yourself to those agents and sign up to be notified when a property comes on the market that meets your criteria.
  • Be on the lookout for HUD foreclosures. These properties are FHA insured and may provide a good buying opportunity.
  • Get pre-approved, not pre-qualified. Pre-approved means the majority of the paperwork has been completed and is ready and available when you need it. Not only does pre-approval allow you to jump on the best deals but it also sends a strong signal that you are serious about the offer. Banks and sellers facing foreclosure want the fastest closing possible and are more willing to negotiate with those able to seal the deal quickly.
  • Learn how to discern. Don't make the same mistake that millions of novice investors made during the height of the real estate bubble; not all real estate is equally valuable at the same time. If you are seeking cash flow then avoid areas with high crime rates, or pollution and avoid properties with deferred maintenance or other problems that can cut into profits. On the other hand, if you want to flip a property, then buying for long term appreciation could be a recipe for disaster. Know your exit strategy and learn how to crunch the numbers and buy right from the beginning. Some properties are "cash cows" but will not gain much in future appreciation, while others barely break even but are profitable for the long term. Know the difference and use it to your advantage when bargaining or buying foreclosed properties.
  • Always obtain an inspection. Although most foreclosed properties are sold on an "as is" basis, it is still beneficial to obtain an independent inspection and appraisal. Inspections often uncover additional problems and can be used as a negotiation tool, especially for those seeking a quick sale. Remember, the seller is still obligated to disclose a problem even though the property is sold "as is".
  • Check taxes and insurance in advance! Property taxes and insurance can take a big bite out of profits. Remember, even if you are purchasing a foreclosed property below the current market value, it does not automatically mean the property taxes will fall dramatically. In most areas you will need to petition the property appraiser's office and obtain a new appraisal, which is a time consuming and sometimes costly proposition with minimal chance for success.
  • Permits & Repairs. Never make the mistake of assuming the repairs were properly performed on any property. Take the time to pull copies of the permits to avoid unnecessary expenses and very unpleasant surprises. Without the proper permits, any work may need to be brought up to code or even torn down and redone; more than one real estate buyer has faced massive bills due to improperly performed repairs or permit problems.

Follow these simple tips for buying foreclosed properties to ensure you get the best deal possible before jumping into the foreclosed-property buying game.

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