5 Mistakes Investors make when buying foreclosures

[Veronica Morton]

With the glut of foreclosures on the market real estate investors are rushing to pick up great deals. In their haste they do not perform adequate due diligence. Their attitude is "how can I go wrong", or "how hard is this". Somehow they have the viewpoint that someone will protect them, if they can get the money. There are a number of very big mistakes that investors are making. We will discuss 5 of those mistakes.

1. Buying a property "subject-To" the existing loan but not reading the existing loan. This is happening in the residential and the commercial market. When the investor buys a property that is subject-to the existing loan the investor is still bound by terms of that loan. Most investors assume that since they did not sign for the loan they are not bound by what is in the loan and mortgage documents.

2. Buying at the courthouse without reading the fine print. Investors assume, without reading, that if they are buying a property at the courthouse that is does not have any other existing liens. In many cases the investor has not done a title check before biding on the property. Recently an investor put $10,000 deposit on a property then he put a bid on the property at the courthouse foreclosure sale. He won the bid. He got it so cheap, how could he go wrong? He later learned that he was buying a property that still had a 1st mortgage on it. If he completed the transaction he would not only have to pay his total bid amount but would also have to pay off the 1st mortgage. He chose to lose his $10,000 deposit. All the information was available; the investor just did not read it.

3. SEC (Security and Exchange) violations. Some investors are trying to get money from anywhere they can. Some try to get money from family and friends and even from people who they do not know well. In return the investor promises them a guaranteed yield or rate of return. They may not know it but there are people in jail for doing this same thing.

4. Buying a property to convert it to a different use without first checking with the local zoning commission. This seems like such a logical thing to do before bidding on a property. You should never assume that anyone else, including the seller, the lender, the county, the attorney, the CPA is going to protect you from everything. It is your responsibility, as an investor, to learn all you can about what you want to invest in.

5. Not finding out about the adjacent properties to the property you want to purchase. This is particularly important when buying small commercial properties, such as self storage units, small apartment complex, small strip plaza and the like. Environmental issues are a big problem in most areas. If there is a gas station near the property then you need to check about the possible leaking in the past and possibility of leaking in the future. If there has been a dry cleaner establishment near the property they could have dumped their waste water on your potential purchase. Has there been some unwritten agreement between the former owner and any other adjacent business such as water pipes across the property. Title insurance does not cover these types of things.

Just because property is cheap and easy to buy does mean that you can relax your due diligence. Even though there are hundreds of things that can trip you up that does not mean that you should not invest in real estate. It is just like driving a car. You have to learn how.