Overrated: Making money from foreclosures a route to ruin
Thanks to television shows such as "Flip This House," many Americans have caught fix-up-and-flip fever, buying foreclosures and attempting to resell them after minimal improvement for big bucks. The reality of this strategy wasn't great before the housing bust, and for the unsavvy investor it can be suicide now.
Buying a foreclosed home isn't like shopping Sunday open houses. The homes often go up to bid without inspection, clear title or even vacancy; squatters could be cooking meth even as the gavel falls. The family who has lost the house might even still be living there, forcing you, Simon Legree, to evict them. They often take revenge on the house before they leave, too.
Financing a foreclosure purchase is even dicier. The selling bank wants its money immediately, and finding deep pockets willing to loan against a foreclosure is very difficult in a falling market.
Don't miss the rest of our series on Overrated people, places and things!
Yes, some shrewd investors still make money flipping or renting foreclosures, but some people also win at roulette. That doesn't mean that putting your life saving on red to win makes sense for most of us.
If you are determined to make money on the foreclosure industry, the safer bet is to write a book, start a web site or offer workshops on how to make money on foreclosures. That industry is still thriving, proof that there is still a sucker customer born every minute.
For a counter view by WalletPop's Brett Widness, read The price is right.
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Reader Comments (Page 1 of 1)
9-11-2008 @ 10:03AM
buddapeacecz said...
Don't let them scare you, nothing comes easy and without some work...if you were told only the negatives about your job, would you have taken it?
Bought my first home on a foreclosure, and was able to walk through with a realtor before bidding.....did lots of work, but bought at 55k....sold at 140k....not too shabby.
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9-13-2008 @ 6:52AM
Ain't No Free Luch said...
Your experience is the very rare exception to the rule. Even if I had taken my job after learning all it's pitfalls, I could still quit. Can't do that with a foreclosure, my friend. Once it's yours, it's yours.
After having worked as a banker in foreclosures for may years, I can state unequivocally that of the hundreds of foreclosures I worked on, I can count on one hand, the number I would have bought at auction.
In real estate, no one gives anything away, ever. More than likely, the bank will try to recover every dime possible, whether at the auction or after they acquire the property. Keep in mind that before the auction even takes place, the bank knows exactly how much that property is worth, how much they have invested in it, how long it will be on the market after acquisition, and how much it will sell for. So, unless you're armed with the same info, to even consider bidding would be folly.
Because of all the books on the market, auctions have become a feeding frenzy because of all the suckers who think they can get a free lunch. All they do is drive up the prices. Keep an eye on the person bidding for the bank. When he stops bidding, the bank has reached its threshold. But then again, maybe not. They may be watching you, so they throw the dice and continue to bid, knowing that you will bid higher. It's not such a bargain anymore is it?
Read all the books you want, but the best advice you can get is that unless you are an expert in real estate, NEVER attempt to buy a foreclosure without the benefit of an interior inspection and a real appraisal. Even then there are no guarantees, because a lot of things can happen in the interim; like somone removing the plumbing or the furnace, or just plain trashes the joint. CAVEAT EMPTOR!!!!!!
9-13-2008 @ 6:35AM
Jiggy said...
Only look at foreclosures if you have time and money. The homes listed usually are not available and it is time consumming at best to find the proverbial good deal. The services offering insight and foreclosures for a fee are a waste of time and money also. If you're wanting to be a slum lord by picking up cheap properties I challange anyone to be successful in California or Florida markets picking up prime properties at bargain basement prices. What's the small print at the bottom of the screen "results not typical"!! Go ahead and try it for fun but you'll probabley pay several hundred dollars finding out that most foreclosures listed are already sold and clearing all the paperwork hurrdles is beyond most folks and the process can take 90 days or more to complete. Yea, someone can boast they made $60k flipping a foreclosure by fixing it up. Big deal. How much agony and money did they put into it and did their relationship survive it? Leave this to the hardened investor and look for a home the conventional way. There are always fairly priced homes for us normal folks.
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9-13-2008 @ 5:13PM
RDSCOTT said...
IT'S AMEAZING THE OUTSTANDING GRAMMER ALL YOU FRICKEN MORRON RIGHT WING EXTREMISTS USE. ITS JUST A DAMB SHAME YOU WANT TO BLAME PRESIDENT CLINTON FOR THE DEREGULATION OF THE MORTGAGE INDUSTRY, AND THE DEREGULATION OF THE OIL INDUSTRY AND THE DEREGULATION OF THE HEALTHCARE INDUSTRY. ITS HARD TO BELIEVE YOU WOULD BE SO BRIGHT YET SO BLINDED BY THE TRUTH. BY THE WAY GET LAID IVY BOYS THEN PALIN WOULD'NT BE SO EXCITING TO YOUR PANSEY ASS.
Reply
9-13-2008 @ 6:53PM
Matt said...
Hey RDSCOTT,
You're funny. What were you replying to, anyway? Two decent well written posts followed your misspelled rant. What a goomba. Go back to high school.
9-28-2008 @ 3:14PM
Sandy said...
You forgot to blame Clinton for signing in NAFTA.
9-14-2008 @ 12:27AM
charlie said...
I just married a rich woman and treated her good. Its alot easier and more fun.
Reply
9-14-2008 @ 8:43AM
Lawrence said...
A typical "filler" article. Here is a reporter stereotyping about a "foreclosed" home. He obviously never purchased one or knows nothing about the process. There is a bifurcation in foreclosures and prospective buyers should know the distictions. a) Pre-foreclosed can be obtained from a lender on a short-sale.b) Foreclosed homes are generally sold from a realtor who sells the property for the bank after it forecloses at auction. These are called REO's (Real Estate Owned) for some stupid reason. In any event you always are able to inspect the home to see what you are getting into---I have no clue what this reporter is talking about intimating that you are buying blind. Moreover, inferring a foreclosed home is always a wreck is like saying all white people are racists. "Normal" people are being foreclosed on because they are being priced out of this economy or couldnt afford the mortgage from the get-go.I've seen multi-million dollar foreclosures. How do I know? I'm President of United Foreclosure Solutions in New York.
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9-14-2008 @ 1:36PM
Chicagoatty said...
One really big issue in buying a foreclosed house is how you buy it - depending on the laws in your state, you can buy it after the foreclosure, from the bank's realtors; you can buy it at the foreclosure auction (not advisable unless you know the house from the inside out - also make sure that you know the relationship between the amount of the judgment and the actual value of the house - remember, the judgment reflects added attorney/collection fees); you can buy it from the owners during the foreclosure process (get a home inspector & a good title search to search for "hidden" liens, such as "weed" liens and utility liens that might not show up on the foreclosure - also keep in mind that you don't have any warranty on the title - if it turns out that there is a "senior" lien that does not show up on the forclosure complaint, you may not have any recourse - you pay the $$ & the senior mortgage still gets to foreclose!); you can buy the note & proceed with the foreclosure yourself (only good if you can afford to give "cash for keys" or are a foreclosure attorney & have the $$ and nerve to proceed with an eviction, which, if I have been informed correctly, in some states can take years!) So, the article is right, only the very well informed and well financed should buy foreclosured property. As an attorney, I did foreclosures for several years (before the present mortgage crisis), and never once was the property left in good condition and mostly the prior owners did not leave willingly. Since I did contested foreclosures, sometimes the process could take years!
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9-15-2008 @ 5:19PM
Ringgold Dan said...
It's my understanding that it costs about $16,000 to clean up
a house after meth has been cooked in it. No small amount.
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