Buying Foreclosed Properties: Important Pitfalls

Many people have started looking at foreclosed properties as a new, cheap real estate investment. Properties at foreclosure sales often sell at a substantial discount, so you can get a very good deal in many cases. There are several problems you have to watch out for, however, so be careful.

First, you need to know the status of the liens on the property. You can’t just go in bidding and expect that you’ll come out owning the property - you need to know who has initiated the sale and what your state law is regarding junior and senior liens. Many houses don’t just have a single mortgage - they will have been used as security for multiple debts. A lot of would-be investors get burned this way - they buy a house for what they think is a good price, only to find out that there is still a large debt outstanding which they either have to pay or lose the house to yet another foreclosure sale. You’ll need to do a title search to find out whether there are any other loans, and you need to be familiar with state law on this subject.

Second, you should watch out for houses which you know nothing about. Don’t just rush in bidding based on the listed information - that’s the biggest newcomer mistake. You need to know something about the property and it’s condition - remember, the current person living there has just lost their house. They often don’t think twice about damaging it, and their anger at the bank can result in financial losses for you.