Seven Tips to Profitable Investing in Foreclosures
Have you been thinking of investing in a foreclosed home? The game plan sounds simple enough: purchase a foreclosure at pennies on the dollar, cover the mortgage by renting the property to tenants, and then sell it at a tidy profit when the economy recovers.
Unfortunately, when it comes to buying foreclosures, "things are not as simple as they appear," says Jim McClelland of Mack Companies, a Tinley Park, Illinois firm with a portfolio of 365 previously bank-owned homes under management.
McClelland knows foreclosures: he buys two or three each week. Most of his homes are located in Chicago's south and west suburbs, such as Dolton, Olympia Fields, Homewood and Glenwood. Mack's in-house contractors redevelop these often badly run-down homes so that they can be rented out.
Foreclosures can be either a financial boon or a boondoggle. To help smooth out the inevitable bumps in the road to real estate riches, McClelland offers this advice:
1. You are investing in a community, not just a home. The neighborhood in which the foreclosure is located will ultimately determine its long-term appreciation. Before being lured in by a low price, do your homework. Is the town investing in new infrastructure, roads, schools, libraries and public parks? Is the downtown area thriving or declining? Bottom line: if the local government or businesses are not investing in the town for the long-term, neither should you.
2. Stick to REOs: A "Real Estate Owned" (REO) property is a safer way to purchase a foreclosure. Unlike a home sold at auction or purchased during pre-foreclosure, its title is held by a bank or lender; there are no other liens against the property. While an REO's price discount is typically less than a foreclosure sold at auction, there is also less financial risk. Inspections are allowed. No evictions are required. Plus, the bank will see that the property is cleaned out before you take ownership, saving you potentially thousands of dollars in labor cost and dumpster rentals.
"Investors should know that homes sold at public auctions are the leftovers of an inventory picked over by professionals," warns McClelland. "Buying one sight unseen is a gamble."