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Beware Of Hazards When Investing In Foreclosure Properties

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By SHANNON BEHNKEN

The Tampa Tribune

Published: March 16, 2008

TAMPA - One in every 254 homeowners in the Sunshine State received a foreclosure filing in February. That's the third-highest in the nation.

The foreclosure crisis is negatively affecting neighborhoods and the economy.

But like every crisis, this is viewed by some as an opportunity to profit.

As more homeowners and lenders get desperate to unload properties, they cut prices, making foreclosure homes enticing to real estate investors. Books on getting rich quick off foreclosures arrive on bookshelves daily, and experts are traveling the country holding foreclosure seminars. The process looks so easy that even people with no real estate experience are hanging out at county courthouses, poised to make offers on foreclosure properties.

With foreclosures on the rise and mortgage interest rates low, this may indeed be the perfect time to invest. But, experts warn, it's easy to get trapped by pitfalls in the market. If you're not careful, some warn, you may wind up in foreclosure yourself.

The Tampa Tribune interviewed three experts on investing in foreclosure properties and offers a sampling of their advice. The experts are:

•Ralph R. Roberts, co-author of "Foreclosure Investing for Dummies" and a real estate agent and investor in Michigan.

•Mike Kane, chief executive officer of St. Petersburg-based ForeclosuresDaily.com, which sells foreclosure data and holds classes on investing.

•Annalisa Burgos, real estate editor of FrontDoor.com, a Web site that features content from HGTV.

Don't assume it's a good deal just because the home is in foreclosure. And make sure you get a fair price.

"Sometimes people get caught up in the foreclosure hype and end up paying more for a home in foreclosure than they would pay for the same house down the street that's not in foreclosure," Roberts says. "Foreclosure homes are not always a good deal.

"People don't realize that you make your profit when you buy and then you realize the profit when you sell. If you pay too much, you won't make the profit on the back end. Even if you think you're getting the home for a great price, you have to factor in the costs of fixing up the house."

Do your homework.

Do a title search. Find out who all the lien holders are, and make sure you know the homeowner's situation. You could get stuck having to pay those liens.

"Some novice investors can get into trouble when the lender holding the second mortgage forecloses before the main lender," Kane says. "The investor may actually be buying the second mortgage and find out they still owe the first mortgage."

Get an inspection, if possible.

Some deals that look too good to be true are just that, Burgos says. An inspection may show foundation, roof or termite problems. Some auctions don't allow investors to conduct inspections before the sale, she says. Investors should be aware that at those sales, the deal may be final, even if the home has problems.

Some auctions will allow investors to tour the home. If that's the case, Kane suggests you take a professional inspector or a friend with a good eye for problems.

Don't wait for the home to work through the foreclosure process.

Buying a home directly from the homeowner, before a lender takes it back, could result in the best deals, the experts say. You can get lists of homes entering the foreclosure process at local courthouses or from some Web sites.

Frustrated homeowners are sometimes willing to give deep discounts to avoid a foreclosure on their record. Lenders who have a lot of foreclosure homes on their books are increasingly willing to accept short sales, which means they'll allow the homeowner to sell the property for less than they owe.

This method isn't best for most novices, Burgos warns, because it requires heavy negotiating with homeowners and lenders.

Don't buy in a neighborhood with numerous distressed properties on the same block.

If multiple homes on the same street are in foreclosure, that could be a red flag that there was investor fraud in the neighborhood during the boom years, Roberts says. If that's the case, homes may be overpriced, and you don't want to invest there.

Walk the neighborhoods and talk to neighbors, he suggests.

"If the whole neighborhood is in trouble, you can't fix that with your one investment home."

Invest close to home.

Roberts recommends beginner investors print out a map showing where they work and where they live. Draw a triangle around the two locations and don't invest outside of that area.

"You don't want to drive 45 minutes to work and then have to drive 45 minutes more to get to your investment property," he says. "You need to be able to get there easily and often."

Buy and hold.

"In this market, people can't even sell their own homes, so it's difficult to quickly flip a foreclosure home," Burgos says.

During the housing boom, investors bought homes and immediately flipped them to other buyers for a profit. That time is over, Roberts says. You can make a lot of money investing in foreclosure properties, he says, but you should be prepared to keep and maintain the property for several years.

Reporter Shannon Behnken can be reached at (813) 259-7804 or sbehnken@tampatrib.com.

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