Buying a foreclosure can be a tricky process to navigate when it comes to real estate investing. Foreclosures are on a different level of real estate investing than other types of investment properties.
Real estate investors can find many amazing real estate investing opportunities when buying a foreclosed home. So, it isn’t something that you should just avoid because it can be a bit complicated. Instead, beginner real estate investors should understand the process of buying a foreclosure as well as what mistakes can occur. Keep reading to find out about the major mistakes to avoid when buying a foreclosure.
Mistake #1: Walking in Blind When Buying a Foreclosure
You’ve probably read this a hundred times in posts about real estate investing for beginners, but there’s a reason why. Beginner real estate investors who walk into buying a foreclosure, or any real estate investment, without a clue end up falling flat on their faces. The risk involved in foreclosures is great, and it becomes even greater when a real estate investor knows nothing about the investment property or the deal.
Minimize the risks and make buying a foreclosure easier on yourself by researching everything you can about the foreclosure process as well as how to purchase the investment property. Being here, reading this post, means you’ve taken the first step. Check out our guide to buying a foreclosed home to help you further in your mission for knowledge.
Mistake #2: Real Estate Investing for Beginners: Going in Without Expert Advice
With time, real estate investing can become second nature, and a real estate investor can do everything on his/her own. However, real estate investing for beginners can be overwhelming at first, especially when buying a foreclosure. This is why when you are first buying a foreclosed home, it’s a good idea to consult an expert.
Consult a Real Estate Agent:
Real estate agents will be your best resource when buying a foreclosure. There are real estate agents who are experts in foreclosures and the process of buying a foreclosed home. Not only will they assist you the first time around, but this is a good way to quickly pick up a lot of the basics of real estate investing without taking on the risks that come along with it. Mashvisor can connect you to a great real estate agent in your area to help you.
If a beginner real estate investor insists on buying a foreclosure on his/her own for the first time, we suggest turning to Mashvisor. Mashvisor can help you find a foreclosed property and assist you in determining if it will give you a good return on investment.
Consult a Legal Expert:
The foreclosure process has different stages at which a real estate investor can consider buying a foreclosed home. At certain stages (like pre-foreclosure or during an auction), there could be different liens against the property that you will become responsible for as the new owner. A lawyer specializing in real estate investing can inform you about all of the fees and liabilities you will be taking on.
Related: 5 Legal Real Estate Investing Tips to Know Before Buying a Property
You might avoid hiring these experts of real estate investing because of the costs. In reality, the costs will not compare to the losses you will face from a bad real estate investment or the unexpected legal fees you won’t be prepared for.
Mistake #3: Not Having Financing in Place When Buying a Foreclosure
Some stages of the foreclosure process will require that a real estate investor pay the price of the investment property in cash. If a real estate investor goes through these stages without the cash, he/she could lose out on really good real estate investment deals. Try to get pre-approved before buying a foreclosed home to prevent this issue.
Mistake #4: Becoming Overwhelmed by the Variety of Foreclosures
There is a variety in the type of foreclosures available in different real estate markets. While this is actually an advantage of buying a foreclosure, it can make real estate investing for beginners a bit overwhelming. Before getting into buying a foreclosure, decide what type of investment property suits you. This means taking a look at your real estate investment goals, your goals for making money in real estate, and your real estate investment strategy. Planning all of this will make buying a foreclosed home much easier.
Mistake #5: Assuming All Foreclosures Make for a Great Real Estate Investment
Many beginner real estate investors assume that foreclosures automatically make for the best real estate investments because they can be purchased for lower than market value. However, assumptions like this when investing in real estate can be fatal. Foreclosures need to be analyzed just like any other investment property.
Because buying a foreclosed home can sometimes feel a bit foreign to real estate investors, many forget the importance of a good location. Study the location of the foreclosures you’re interested in or choose a few great locations where you wish to find foreclosures. You can then watch the locations for when foreclosures are listed there or have your real estate agent notify you about listings.
Real Estate Comps:
Investing in real estate requires an investigation into the value of the investment property. In order to move forward confidently, find a few real estate comps for the foreclosures.
Inspecting foreclosures is important. The foreclosure process can be long, meaning that by the time you’re buying a foreclosed home, it has probably been vacant for some time. It could have fallen victim to all kinds of damage such as vandalism, theft, or even damage from disgruntled, evicted tenants. General neglect and lack of maintenance can also have taken a toll on the foreclosures. Inspect the property when the lender allows you to and take notice of any and all repairs needed. Decide if they are worth the investment or if they will end up affecting your return on investment.
Mistake #6: Spending Over Your Budget
Real estate investing for beginners has an added obstacle of budgeting. Many beginner real estate investors don’t plan a budget beforehand, and this is especially important when buying a foreclosure. For example, if you choose an auction for buying a foreclosed home, the price for the investment property can keep climbing, and you have to know when it goes over your budget. At that point, you should walk away. Even if a real estate investor decided to turn to a bank for buying a foreclosure, there is still an element of putting in an offer, and the offer shouldn’t exceed the budget.
The budget for buying a foreclosure should be set at the value of the foreclosed home. In terms of repairs, 10% of the value should be set aside. Arranging a budget also helps real estate investors decide if the repairs on foreclosures are worth the investment. Generally, repairs shouldn’t exceed 25% of the budget. If they do, walk away.
Related: Best Places to Buy an Investment Property on a Budget
Real estate investing for beginners can be difficult when it comes to buying a foreclosure. You shouldn’t have to limit yourself just because this is true. Success when buying a foreclosed home requires knowing what to do and what not to do. Learn the possible mistakes you can face and plan to avoid them. It’s the best way to plan for success with foreclosures.
Related: Ten Real Estate Mistakes Beginner Investors Should Avoid