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Tips for buying a foreclosed home

If you do your homework and stay realistic, you may find that a foreclosure home is your dream home.

If you don't, you may find it your worst nightmare. Follow these tips to ensure a good experience.

Residence or investment?

Whether you intend to live in the home or sell it will make a difference. If you intend to live there, you may have different preferences for the neighborhood and the home's features. You may also want to make repairs on a looser basis than you would if you were buying it for the purpose of selling it again soon.

Find a real estate broker experienced with foreclosures

Not only do they have expertise, but sometimes they know of homes that aren't yet listed. They also keep up on local laws and other aspects of the market. Some brokers work directly with banks to sell REO homes.

Get a pre-approval letter before you start looking

Foreclosed homes can get snapped up fast. Unless you have cash instead, have the preapproval letter from a lender first.

Keep a price range in mind

There's a chance you may get into a bidding war and spend more than you had hoped to. Set a maximum price and walk away if the bids exceed it.

See the home for yourself

Horror stories abound about people who bought a home from far away only to discover it was more of a dump than they'd been led to believe, or worse yet, it was a vacant lot. Either see it for yourself (inspect it if possible) or send someone to see it for you. Also, it's a good idea to make sure that no one is still living in it. That can bring extra problems, such as the need to get an eviction notice.

Have plenty of cash on hand

Getting a home for a low price can make you forget why you're getting it for a low price. Are extensive repairs needed? Make an estimate and set aside enough money for it. Then set aside a few thousand dollars extra. Also, remember that fixing up a home can sometimes increase its assessed value, which can raise your property taxes. On top of this, there may be judgments and liens and the like attached to the home that need to be paid off.

Look at the neighborhood

If the home is in a distressed neighborhood, you might not get a good resale price. If there is a lot of crime, you may have additional expenses such as vandalism to worry about. You may also get hit periodically by various assessments aimed at fixing bad infrastructure. Then there are issues such as excessive noise, unruly neighbors, and such to keep in mind.

Look at the yard

Roots, branches, and vines can intrude into the foundation or through windows. Pools of standing water can contribute to deterioration of basement walls. Make sure the yard is in good condition. The ground should be graded properly, brush should be kept at a safe distance, and concrete should be in good condition.

Learn how long the home has sat empty

The longer a home has sat empty, the more opportunity there is for decay. Mold, bugs, sewer gases, and plumbing can get worse. Leaks in the foundation can also get worse. If the home wasn't winterized, there may be cracked pipes that will need fixing.

Get an inspection

If at all possible, invest in an inspection. It can save you thousands of dollars down the road. At the very least, it can give you a heads up on where your money is going to go during the next few years. In some cases, an inspection can give you time to make repairs in advance, saving you damages in the future.

Look into HUD homes

The Department of Housing and Urban Development holds a fraction of the foreclosed homes. One advantage of HUD homes is that they stay maintained.

Be realistic, and do your research beforehand

Don't go into them expecting big profits quickly. Foreclosures can be a headache. You can sink more money than you expected into them. They may not sell for what you expected. They may sit in your hands longer than you had hoped.

Dive Deeper: Buying a foreclosed home: The full breakdown

This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.

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