Real Estate — Foreclosures: Sugar or Arsenic?

To the novice real estate investor foreclosures often look irresistibly attractive. Who wouldn't want to make a quick profit of 50% or more? But whether a foreclosure deal is really sugar or merely sweet-tasting arsenic depends on a list of complex factors.

Foreclosure is a legal procedure in which a mortgage holder reclaims a property due to default on a loan. Some states in the U.S. allow 'strict' foreclosure - the borrower has a certain period to make the debt current, after which the title reverts to the lender.

Needless to say, you don't want to get in the middle of someone's legal process. Any thought of holding out a promise of 'rescue' to the current owner in exchange for part or whole ownership is suicidal. Look elsewhere for that great deal.

Also keep in mind that, in some foreclosure proceedings, borrowers have the 'right of redemption'. This allows them a certain period in which to 'cure the loan' - make back payments, shore up credit, etc - and reclaim title to and possession of the property. Stay clear.

Once the foreclosure process is complete, or at least inevitable, you can put in action a plan to acquire the property. Look for deals in which, at minimum, a Notice of Default has been issued.

Auctions on foreclosed property are common but tricky. Never bid blind on a property. There's no substitute for first hand knowledge of the physical condition and legal status of a property.

Keep in mind that foreclosures are sold 'as is'. Unlike other property sales, no warranties are provided and no title insurance granted.

At minimum, you'll need to have a professional inspection performed, even if you are a knowledgeable investor. Some investors are, of course, professional inspectors themselves - along with wearing many other hats. The property needn't be free of every tiny defect, but you'll want to know that the roof doesn't need to be replaced, that the plumbing is sound, there are no serious foundation cracks, or potential for flooding, etc. If any of those are present, they can be acceptable if you're looking for a 'fixer-upper' and have the time and funds. Discount your offer accordingly.

Eventually you'll hear about someone entering a 'short sale' deal. This occurs when a lender is willing to accept less money for a property than is outstanding on the loan.

Another type of foreclosure opportunity is the REO - real estate owned (by the lender). These are properties auctioned but not bought. It's possible to get some very good deals, but exercise extreme caution.

Remember to do your research. Get a thorough inspection and perform adequate title research. Any major defects or encumbrances in the form of tax or other liens has to factor large in your plans.

Remember, arsenic just tastes like sugar, it's still poison. Learn to tell the difference.