"Buy low, sell high" is the mantra for Wall Street wizards, but it applies to the housing market, as well. When purchasing a property in foreclosure, it's important to do your homework to ensure that the investment is a good one.

At first glance, a property in foreclosure as a result of a bad credit mortgage seems like a steal. All that an investor needs to do is find one, buy it below market price, and then sell it for a higher number. But in the world of bad credit mortgages and foreclosed properties, nothing is as simple as it seems.

Tough to find

Finding homes for sale is easy. Finding one that's obviously the result of a foreclosure isn't. In most cases, you won't be able to tell a foreclosed home from a regular one. Banks hire real estate agents to sell the properties, and these agents list the homes as they would any others in their inventory. If a bank lists their properties on their website, the property is generally handled by the institution's asset manager. Unlike a realtor, this person will probably only respond to you if all your documents are in order and your financing is set.

Some websites offer names and addresses of properties under foreclosure, but these are fee-based and may be restricted to certain geographic areas. If you use a web-based service to locate a property, the house in default may not always be for sale. An owner has three months to make back payments before his home is lost, and people in this situation are generally not willing to talk to the foreclosure vultures swooping above their rooftops.

Inspect before bidding

If a home goes into foreclosure, a public auction may be held to sell off the asset. Title companies and other trustees hire professional auctioneers to run such sales. These are high-pressure affairs, and novices can lose their shirts if they're not careful. It's common for buyers to overbid on a property when they're caught up in the heat of the moment.

The wise investor will have a foreclosure property inspected before the auction. Quite often, a home is in disarray, and many of the repairs may require a significant amount of capital. A complete home inspection will uncover most major repairs needed. An investor can then incorporate those costs into the bid, and establish the maximum amount that he's willing to spend before the auction begins.

The demise of the bad credit mortgage market has left thousands of foreclosed homes in its wake. For investment professionals eager to buy low so that they can eventually sell high, this seems like a golden opportunity. But like any potentially lucrative financial transaction, it's only the true experts who reap the most significant rewards. Buy low and sell high is an applicable maxim for investors, but novices needs to remember another saying before entering into foreclosure: look before you leap.

Published on February 1, 2008