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Many investors are aware that buying foreclosed properties could be a good investment, but do not know how to buy a foreclosure. A true foreclosure purchase is done at public auction, after the property has been foreclosed but before the bank has taken possession. An investor must find out where the auctions are advertised, research the property, show up at the appointed place and time, and be ready (with a cashier’s check in hand) to bid.
However, knowing how to buy a foreclosure is not as important as knowing when to buy a foreclosure. There is one major benefit to buying foreclosures, and that’s the price. Foreclosed properties can be sold at fraction of their value. But there are a number of potential pitfalls. Here are some of the biggest to look out for.
Properties generally cannot be inspected: Foreclosures are sold “as is.” Usually, the owner or tenant has not even been evicted. Without access to the property, it cannot be inspected. A “drive-by” inspection may allow an investor a guess as to the property’s condition, but he cannot know specifics until he has paid for the property.
Properties are generally sold without title insurance: Foreclosed properties often have tax liens against them or a confusing ownership history. A thorough title search should be an investor’s top priority when preparing to bid at foreclosure auctions.
Property values may be dropping: What looks like a good foreclosure purchase now may not turn out so great six months from now. In order to avoid surprises, an investor should only buy foreclosures in areas he is familiar with.
Knowing when and how to buy a foreclosure is an art, not a science. The artful investor will need to balance the risk against the reward in order make good foreclosure purchases.