Should you invest in foreclosure properties?

Having a few years of real estate investing under my belt, most recently buying, selling, and renting foreclosed homes condos and apartments, I am not surprised by the number of people who express an interest in investing in foreclosed properties. Sure, it looks like "easy money", but the average person just doesn't have a clue when it comes to the true amount of risk, research, and hard work that make for a profitable investment in a foreclosed property.

Let me preface this article with a little background: I am just an average real estate investor in my 40's, without a huge bankroll or partners. I buy, sell, and hold properties for my own modest portfolio. I live near Chigago, Illinois, and purchase properties at Judicial Sales (Think auction on the steps of the courthouse!). Illinois statutes apply in my examples and may differ where you live.

I have identified a few key questions that an individual would have to ask themselves to decide if investing in foreclosures is right for them.

First: Do I have sufficient working capital to invest in a foreclosed property?

You need CASH to buy properties at Judicial Sales. Usually a 10% deposit at time of bid, and the balance due within 24 hours. In addition to the purchase price, you will need funds to improve the property if necessary, and be responsible for other costs of ownership such as property taxes, insurance, and utilities.

Second: Do I have the knowledge to navigate the legal landscape to invest in foreclosures successfully?

The recent headlines about "Robosigning" highlight the complex legal rules of determining property ownership. Foreclosure rules and procedures differ from state to state. You need to be certain that before you bid on a property, the chain of ownership is clear, and once you make your purchase, you will become the new legal owner free of any liens or encumbrances.

Third: Do I have a good understanding of my local real estate market?

Having access to current sales data for your market will help. Look at the facts, and make purchasing decisions accordingly. 50% off of the 2008 price of a home might be a great deal in one market, and not so great of a deal in another.

Fourth: Can I be patient, and unemotional in my decision-making?

Great properties are not available at every auction. You need to balance your need for a property, and your need to make a wise investment. Don't commit your working capital to a marginal property with limited potential just because it was the best available that day. There will be another auction tomorrow, next week, or next month.

Fifth: Do I have the skills to manage a real estate project from start to finish?

From my experience, every property is going to need some improvement to maximize it's full market potential. Sometimes it can be as simple as cleaning windows and an air freshener, but more often it's a new kitchen, a new bathroom or two, and all new flooring and paint. Be prepared for the unexpected. If you are handy, and have the time to make all or some of the improvements, that's great. If not, be prepared to spend lots of time planning, and money paying contractors to do the work for you. Either way, you will need good project management skills to get the work done as quickly as possible, as economically as possible.

These are just the most basic of questions that you may want to ask yourself. If you have any interest at all in finding our more about the foreclosure auction markets, I would recommend that you attend some auctions.

Coming soon: Part 2, Where do I start?