I’ve invested the bulk of my money traditionally with stocks and bonds, but I’ve day traded and invested in coins and antiques, too. I consider myself an informed risk taker, but there’s one “investment” I won’t touch: foreclosures.
I have worked in the foreclosure department of a local auction house, and I fielded calls from people looking to make quick money by buying foreclosed homes, fixing them up and selling them for a profit. People see the various “flipping” shows on television, couple it with statistics of a down real estate market and decide that equals a financial killing in the making.
Those phone calls amaze(d) me. I often knew the background on the homes being sold (at good prices on paper), and I wouldn’t buy them. I took a call from a family on their way to an auction. They knew nothing about foreclosures or the process of buying at auction. The prices looked so good, they told me. What advice could I give them?
“Turn your car around and go home,”I said. I said it softly because the aim of the auction house was to get people—educated, but especially not educated—to attend the auctions. The hope was that “auction fever” would take over and they’d bite on a house, often going over the limit they’d set for themselves.
Late-night television is rife with people hawking programs on making money with foreclosures. No matter how long you watch—or how many programs you watch—you will walk away knowing no more than you did before you turned the television on. Someone is making money in the foreclosure business, but it’s not the lone investor.
Auction houses may post the rules of the auction in small print, but they’re counting on the fact that we won’t read that fine print. I have the knowledge. I know the fine print. Let me tell you what I learned working in the foreclosure department of an auction house:
What you see is not what you get. You can’t inspect a home in foreclosure. In fact, if you walk onto the property, you’re trespassing because someone still owns the home, despite the foreclosure in progress. Unless you have x-ray vision, you have no idea what is going on inside the home.
Even if you know the neighborhood, you don’t know the recent history of the property. A home was being foreclosed on in my childhood neighborhood, so I was curious. I had known the family who had owned the home several years ago, but the recent history was a mystery. I learned from friends and relatives that just prior to the foreclosure, termites had decimated the main structure, and it would have to be gutted. You can’t tell that from the exterior of a property, so had I bought the property, I would have lost money, regardless of the price.
I also know that once you win the auction, you have made a contract to buy the home. How you get the money is of no concern to the auctioneer or the lender.They reel you in, then you are on your own.
You must either have the entire amount needed to buy the home or know that a bank is going to lend you the money. A bank may decide that the home is not worth what you bid, so you can’t get a loan. Financially, you’re stuck.
If you can’t get a loan, the lender may choose to auction the home off again. That doesn’t let you off the hook. If it sells for less than what you bid, you will owe the difference between the nice price and the price you bid, as well as legal and administrative fees.
No, no foreclosed homes for me.
Do people make money in foreclosures? Absolutely. People in the home building industry or those with cash to invest can afford to take the risk. It generally takes ready cash, a lot of research, as well as a lot of sweat equity to make money investing in foreclosed property worthwhile.
And if you are looking to buy a foreclosed home to live in, the stakes are even higher. I had my sights set on a house almost directly across the street from my dad. From a monetary standpoint, I found out that the basement had flooded and the drywall had to be gutted and reinstalled, making it a horrible investment. That’s not the thing that would have been the issue. Because the neighbors were close to my family and chatty, I learned the lesson that will keep me away from foreclosures forever.
As lovely as the home was the outside, it had problems I couldn’t live with. On the one left side of the property was that family (and every neighborhood has one) that never cuts the grass and keeps their Christmas light up year round. On the other side was a convicted pedophile. It should have had a “RUN” sign on it, but it didn’t. It had a low pricetag which would have attracted me had I not had the inside scoop.
Deal or no deal, I couldn’t guarantee my quality of life, and you never can with a foreclosure. Unless I know the family being foreclosed upon, I’d keep on walking every day of the week. Some deals are not deals at all.
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