The Creative Investor - The Pitfalls of the Foreclosure & Homes Sold as Investment Properties

Are we looking beyond the hype? I notice websites and magazine ads and spam after spam about foreclosed properties for sale and the equity that comes with them. How do we know if the equity is real?

These and others like them are the questions we should be asking ourselves and our realtors

when we decide to offer on a 'deal'.

How long has this property been for sale?
Was it for sale before and then taken off the market and back on again?
When we look at the comparable market values of recent sales and listings, is this information skewed to fit our interests?
How many other homes have foreclosed in the subdivision?
How many other rental homes are there in the subdivison?
Analyze the property value based on the highest price home and the lowest price home in the neighborhood. Sold price, not listed.
How many homes are currently for sale in the subdivision?
Draw a map from the center of the prospect property and get a full comp report including answers to #4 and #5 on every subdivision in a 5 mile radius.

It may be difficult to get accurate information like this if you are not using a real estate agent or broker, but you may be able to access the tax records and the consumer listing sites to get some of it. If you are using an agent and he or she is not able to have all of these questions answered in detail within a few hours, then wave that red flag high, because something is not quite right about the 'deal'. And if your agent makes you feel uncomfortable about the questions or acts as if the home will be sold by the time it's compiled, then walk away and find an agent who will work for you. In a environment that moves so quickly, too many factors can be hidden in the hype.

One other ptoential pitfall to watch out for.

Properties being sold as investment. Many times an agent will sell a property to an investor and when the investment is not profitable or does not get rented, the same agent will now market the property to other investors. Both the agent and the seller have motivation to move the property, in which case, the facts are not jumping out in this type of sale. The only way to safeguard against this type of hype is to ask your agent or the listing agent to get some facts from the current owners on the history of their investment. They don't have to give you information, but if it's a secret, it probably means a red flag is waving.

Even if you are not using a buyer's agent, you should be able to contact one in the area who has an investment property background and ask them to charge you a flat fee for providing you with the comps surrounding your potential purchase. If you find one who is interested in long term relationship building, chances are they will be happy to provide the information for no charge.

The term 'buyer beware' has never been more applicable than it is for investors in today's market.