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Tips for Buying A Foreclosure

Updated on June 23, 2010

With the economic condition America is currently in, Foreclosures are dominating the market. There is over a million foreclosures on the market right now, and that number is showing no signs of shrinking anytime soon. With so many out there, the temptation to jump in the foreclosure flipping game is very tempting.

However, before you start spending money and taking on all that risk get a game plan together.  Know what you are doing.  This is not the type of business you get into with no knowledge whatsoever.  I've got a few tips for helping you out in your journey.  Keep in mind this list is not all inclusive, but is intended more as a starting point.  If you follow all these tips, you may not necessarily become a millionaire or even have a successful flip for that matter, but they definitely are going to help you out.  Please enjoy and Happy Investing!!!

Get an Inside Guy

 Like with every other aspect of business, having contacts are key.  More specifically, having contacts that are loan managers or asset managers that can give you a head's up could be greatly beneficial.  The managers will have first hand knowledge of what properties are about to be foreclosed on or are in search of a short sale. 

Being armed with this knowledge, an investor can put first dibs on a property and quite possibly be able to purchase the property before it goes to auction.  If a short sale - buying a property for less than the owners owe - is possible, then your contact can call you up and let you have the option of buying it before everyone else knows about it.  The key is to be the first and only potential buyer of the property, other bidders can only lead to higher prices, and higher prices lead to lower profits.

Don't Loose Sight of Your Goal: Profit

 If you are interested in a property that has other people interested as well, this could lead to higher prices.  The key here is to stay calm and not lose your head here.  Everyone is trying to get on the foreclosure bandwagon these days to make a quick buck. 

When a bank sends a foreclosure to auction, gobs of interested people are going to show up.  Some are serious, some want to be serious, and some are just there taking it all in.  The wannabe serious investors are who you have to keep your eye on.  An unexperienced bidder can possibly drive up the price of the property to the point where a quick flip is no longer possible.  You can not get caught up in this.  It may be hard.  The competetive edge may come out and you start bidding just to prove you can win.  The problem is that you just may win.  And if you spend $65,000 on a house that needs $30,000 worth of updates just to be sold for $90,000 you  have not accomplished anything other than wasting time and money.

Before you show up to an auction have a price range in mind that will provide you with a strong profit margin.  Stick to this price range and when you flip that house you can walk away with some serious money.  If the auction goes out of your price range, stop bidding.  There are thousands of foreclosed homes out there getting auctioned off all the time.  Just continue searching for that gem.

Get Financial Backing

Not all of us have stacks of hundreds sitting in our closets just waiting to be spent on a investment property.  Because of this, you need to start looking for banks or credit unions (this is also a good time to utilize those banker contacts you've made). This serves two purposes: quick access to capital and it could even help your offer out. 

First off, if you don't have those large stacks of cash handy, you'll need to get pre-approved from a bank(s).  The more the merrier - to an extent.  Ideally you should shop around at least 3-5 banks searching for the best rates and credit line.  You only need to do this when you are close to making that big purchase.  If you know that it is going to be at least 2 or more months away before you're going to put in an offer, don't do this. 

When the bank pulls your credit report it's going to ding your credit a point or two,  However, your report will not reflect this inquiry until the next month.  Thus, you should ideally do your loan searching during the same time span. 

The second reason to open up this credit line is because you may get preferential treatment in your offer.  How?  Let's say you are looking at a property that has been foreclosed on by Regions Bank.  If you put in an offer on this property that is very close to another offer, the bank may take in consideration that you have a line of credit throught them and favor you over the other guy.  The bank is going to make money off of the interest of your loan creating an incentive for them to sell to you.

Befriend a Knowledgeable Contractor

Foreclosed homes are not known for being in ideal condition.  The people who formerly resided in these homes couldn't afford to make the payments, so it's highly unlikely that they took the time or spent the money to keep the property in good shape or up to code.  These is where the contractor will play a huge role.

Walking through the house with someone who has the skills to do home repairs and is knowledgeable of the local code laws can be more beneficial than just about any other aspect of decided to buy.  The contractor will be able to point out the pros and cons of buying that particular house and give you an idea of how much time and money is going to be needed to get the house back in to liveable, sellable condition.  You can then take this amount into consideration when figuring up your final offer.

The first time you use a contractor to do a walk-thru with you, he may charge you.  However, if you later use that contractor he may be willing to consult on your next home for free.  Ideally, try to find a contractor who you can trust and form a long-lasting work relationship with.  Whatever you do, don't try to assess the condition of the home yourself, you could easily overlook something small that may end up being a big deal.  Consider the contractor an inexpensive form of insurance for the long run.

Get Yourself a Real Estate Attorney

After you have decided to buy and got the okay from your contractor, go ahead and put in your offer.  If the bank accepts your offer, they are going to want to move fast in closing the deal.  They will be presenting you with contracts that are several inches thick, filled with legal mumbo jumbo that you may or may not understand. You do not want to sign something that has some fine print that can jeopordize your profitablity of your property.

Enter the real estate attorney.  Your attorney can step in a read over the contract and insure that it is indeed in your favor to go ahead and sign.  Just like the contractor, the attorney should be considered cheap insurance for the long run.

Don't Rush to Make an Offer

When you find that 'perfect' house, you are going to be itching to put in an offer right away.  However, it may be wise to sit on it for a few days.  Let it sink in what you are actually trying to accomplish.  Put pen to paper and make a plan.  Double check that plan and make sure it will actually work.  Run the numbers and make sure you will be able to turn a respectable profit for the amount of effort and risk you are putting in this project.  Get all your eggs in a row and then put in the offer.  Good luck!

Consider an Alternative

Okay, the idea of buying a foreclosure for a ridiculously low price then selling it for a ridiculously high price sure does sound seductive, but let's face it, the market is flooded with potential buyers.  That good deal may just take too long to find.  An alternative to foreclosures is buying a fixer-upper. 

Right off the bat you need to realize that buying a fixer upper is not going to include buying a house for $30,000 from the bank.  You are probably going to spend quite a bit of money on a fixer-upper, but if you choose the right house, fixing it up will not be as costly or as major as buying that foreclosure.  Remember that the foreclosures are most likely going to be in poor condition, but the fixer-upper should be in better shape.  The fixer-upper should not require major repairs, but more like a series of renovations.  Update the kitchen, spruce up the bathroom, bring the paint scheme up to date with the times and you're ready to sell.

Remember though, just because you are buying a fixer-upper and the risks may be lower, there are still risks.  Don't jump into this thinking it is going to be easy.  It's going to take a lot of time and effort, but if you do it right and have lady luck on your side you will be able to make some nice money and start stacking those hundreds up in your closet.

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