Investing in foreclosures can be a great way to make money in real estate. Foreclosures are generally priced lower than similar houses. As such, you may have the chance of establishing instant equity when purchasing a foreclosure. However, foreclosures can have some pitfalls. As such, you need to be careful when you purchase a foreclosure as you may be biting off more than you can chew.
Foreclosures are generally sold “as is.” Therefore, if the previous owner was angry about being foreclosed upon and damaged the property in some way (such as putting holes in the wall, removing cabinets or others fixtures, or ripping out appliances, to name a few), it will be up to you to fix and/or replace these things. Therefore, even though a house may appear inexpensive, you have to factor in all of the repairs you will have to make. Such repairs could cost you thousands or even tens of thousands of dollars.
Because foreclosures may provide instant equity (meaning that you purchase the property for less than its appraised value), you may have instant access to cash. If you tap into the equity in your home (via refinancing or a home equity loan), you could use those dollars towards other investments. In fact, you may be able to purchase another foreclosure.
The biggest problem with foreclosures is that the selling bank controls the deal. Usually, if a seller backs out of a real estate contract, the buyer has the ability to sue for specific performance. Specific performance is a legal remedy that essentially forces the seller to abide by the contract and sell you the property. However, parties can contract around this, and selling banks make sure to do so. Banks usually limit your damages to your earnest money deposit. Therefore, if you enter into a contract with the selling bank to buy a foreclosure and during the closing period the bank finds another buyer willing to pay a higher price, they can cancel the contract with you, return your earnest money deposit, and walk away from their contract with you.
Foreclosures offer the benefits of possible instant equity and low prices. However, beware of prices that seem too low. The property may be destroyed inside and cost you thousands of dollars to repair. Additionally, be weary of the contract with the selling bank because your legal remedies may be restricted by the selling bank’s contract.