5 Costly Mistakes When Investing in Foreclosures

By: Peter Conti

Each year thousands of inexperienced real estate investors are drawn to the promise of big money with foreclosures. it's true that hefty profits can be made in this area. But make no mistake about it.

There are very real landmines that can cost you dearly if you don't know what you're doing. I learned about them the hard way.

So here are just a few you can take with you and use immediately.

1.Allowing the seller to remain in the property after you buy it. Perhaps you're thinking that's a bit harsh. And it's absolutely natural to feel sympathetic toward someone, or a family, going through tough times. But here's what I've learned from experience...

Vacating the property never happens on the agreed upon date. It just doesn't for a myriad of reasons. And that will hurt you as the investor. It will start eating into your profits and quite possibly your checkbook. What's more...you'll be faced with the role of making them leave. It can get ugly.

2.Do not put 'serious' money into the deal before the seller leaves the property. You're the one who decides what serious money is for you. Related to that is refusing to take care of any back payments or investing in repairs until the seller has vacated.

The simple reason is this...

You'll become more committed to the deal if you start putting money into it. Emotionally and financially committed. And if there are any problems along the way it'll be harder for you to deal with.

What if the seller won't vacate? What if something arises that normally would cause you back out of the deal?

3.Be sure to accurately determine the real market value of the property. Conservatively calculate the market value. You'll need to check the resale value and the market rental value.

Maybe you'll decide to sell the property to an investor. Or you may want to hang on to it for a while. Just to be knowledgeable and safe...find out the market rental value.

You can check out recent selling prices for comparable houses in the area. And for rentals you can acquire a rental survey. This is a simple analysis of what similar properties are renting. You'll get a range of rent values from this survey.

4.Be sure to buy title insurance if you're putting serious money into the deal. This protects you from any prior claims or clouds on the property title that happened before you bought it.

Buying title insurance pays for the title company to thoroughly research the chain of title. You'll receive a list of 'exclusions' to the policy.

And it's critical for you to carefully examine this list.

You'll need to determine if you're comfortable with any issues. If not, then be sure to resolve them before you close the deal.

5.Protect yourself from any claims of misrepresentation made by the seller. Clearly the seller is under stress and anxiety in a foreclosure situation. And the possibility exists for later claims of trickery or deception made by you during the deal.

The simplest way to protect yourself is to put everything into writing. Put everything you and the seller agree on into writing.

Follow-up every important phone conversation with a letter detailing what each party discussed and agreed upon. Also...

Include a 'merger' clause in your final contract. This states the agreement is the full and final expression of exactly what you and the seller did and did not agree to.

Investing in foreclosures isn't hard and doesn't have to be scary. But you do need to be armed with valuable, specific knowledge to safely do it. These are just a few of the many real world tips you can use to make healthy profits without worries.

Foreclosures
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