Foreclosure Buying Guide

BUYING DISTRESSED PROPERTIES

Foreclosure Buying Guide
Do not be in a rush to purchase a foreclosure home. Another deal is just around the corner and you can learn as much from the foreclosure home you did not buy as you can from the one you did. The investment in knowledge will not override your long-term goals in the anxious pursuit of your short-term goals.
Familiarize Yourself With Your Real Estate Marketplace
First, become familiar with your real estate marketplace. Real estate markets sometimes differ from town to town and sometimes from zip code to zip code or even block to block. It is important that you know how your real estate market differs from that of the markets around you. Determine your perimeters geographically. As your experience grows, your perimeters can and should expand so that with enough experience and a sizable financial cushion the idea of buying foreclosure homes in different states will become a reality. First, however, you must get comfortable with the foreclosure home market in your own "backyard".
What does the average home sell for in your area? The answer to this question will enable you to determine the spread between the future target purchase price of your foreclosure home and the average sales price (your equity). To use the top-end selling price for that area will not give you an accurate picture. Hope for the best but prepare for the worst.
What is the average time a home is on the market in my "backyard"? The answer to this question will help you calculate the carrying costs of your future purchase as well as determine if one neighborhood is more desirable than another. If your future purchase has a days-on-the-market time which, when calculated, consumes all of the possible profits then you need to know this in advance. Do not assume that because you are more aggressive or intelligent than the average homebuyer you will be able to reduce the time the home is on the market. Often, time on the market has nothing to do with your ability to advertise your home or negotiate. Sometimes interest rates increase quickly (spike), contractors that you hired are late or events that are out of your control will affect the selling date of the home.
How many foreclosure home deals come available on an annual basis? The answer to this question will help you recognize an opportunity from an option. If such deals are rare, then you may have to reduce your expected returns in the short term for a great upside in the future. If a neighborhood has few (if any) home buying opportunities that indicates a strong market. If you have a personal guideline of 15% equity before purchasing a home, you may decide that a particular neighborhood is still desirable even though you can only find a 10% equity position. The appreciation of the foreclosure home in one year will make up the difference.
Rank The Areas Containing Foreclosure Homes in Your Marketplace
What are the most desirable medium to low cost housing areas in your "backyard"? Break down the neighborhoods on your list of foreclosure homes. Assign each neighborhood a number from one to five. One is terrible and five is the best neighborhood for foreclosure home investing purposes. Medium to low cost housing is specified for several reasons:
After you have assigned each neighborhood a value it will be far easier to recognize good opportunities. Foreclosure homes in neighborhood A might be a possible option, in neighborhood B there may be great foreclosure home opportunities and neighborhood C a terrible idea.
Many skilled investors do not know how to make a determination between neighborhoods and may make expensive mistakes that can be easily avoided with this simple system.
Shop For Equity First. Then Marketability.
Many would-be investors make the simple mistake of repeating what they have heard regarding what makes a good real estate investment. They believe that a 3-bedroom/2-bath free standing home is the only investment worth making. This is absolutely not true.
What you want is equity. You do not want to end up with an oddball property. If one-bedroom condominiums are commonplace in your real estate market then they are every bit as valuable as a single family/free standing home.
Shop for equity first and then for marketability. Leave all the foolish notions for those who know less than you. Your potential market has just increased because your knowledge with regard to buying a foreclosure home has increased.
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