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Caveat Emptor: 2 Common Mistakes To Avoid When Buying Short Sales and Foreclosures

Frank DeFazio
2 min read

Short sales and foreclosures are have been hot commodities in the real estate industry for the last few years because buyers and investors believe that they can purchase these homes far below fair market value and in many instances they are correct.  This post identifies two potential sources of risk for buyers of short sales and foreclosures and gives advice on how to avoid these two common pitfalls.

Few in the real estate community would disagree with the idea that the two hottest keywords in real estate for the last few years have been short sales and foreclosures.  With interest rates at historic lows and prices that have fallen substantially from their 2006/2007 highs real estate investors have looked high and low to find  “steals” in every neighborhood.  For many this means searching for distressed properties, namely short sales and foreclosures. Many buyers believe that short sales and foreclosures offer the best opportunity to get a great deal but buying these properties requires experience and caution above and beyond that needed for a traditional home purchase.

Property Condition

All short sales and foreclosures begin the same way, with a home owner who can no longer afford to pay his or her mortgage.  If someone can’t afford to pay his mortgage and is forced to ask the lender for a short sale it is highly unlikely that this homeowner will have sufficient money for the maintenance and upkeep of his home.  Delinquent homeowners can remain in their homes for anywhere from 12-36 months, all the while not keeping up with the routine maintenance a house needs. If the short sale is unsuccessful and the home is foreclosed on it is not uncommon to see the homeowner retaliate by removing appliances or sometimes even severely damaging the home.  When buying any kind of distressed property, make sure to contact a reputable, experienced home inspector and spend some time really evaluating the property.  Get a contractor to give written estimates on any work that needs to be done. Never buy them sight unseen without allotting a significant amount of money for potential repairs.

Unwanted Occupants

Short sales are typically occupied by the homeowner attempting to effectuate a short sale or by tenants of the homeowner.  Homeowners are usually helpful because they have something to gain but tenants may not always be.  Often times the tenant is paying rent but the landlord is not paying his mortgage, which can cause tension and even lead to a situation where the tenant becomes a non-paying squatter.  Foreclosures are usually not occupied but can occasionally be rented by the lender or occupied by a squatter.  When buying short sales and foreclosures, make sure to carefully assess who is currently living in the property and what lease, if any, exists and be prepared to have to evict a non-paying squatter.

For real estate investors finding distressed deals like short sales and foreclosures can make great investments but make sure to get an accurate picture of the property condition and occupancy status prior before letting the ink dry on the purchase contract.

Photo: JefferyTurner

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.