There's an old saying that suggests that opportunity is where you find it. Note that it doesn't say "where it finds you".
This old saying could easily be the mantra of the foreclosure investor. To such an investor, finding a great foreclosure property is like finding a diamond in the rough. And, with foreclosures always present in the real estate market, those "diamonds in the rough" are there for the taking by those that know what to look for. Because so few people are using foreclosure properties to create personal wealth, it leaves the playing field open for savvy investors willing to learn the ropes and pull up their sleeves. (For more on foreclosures, check out our Subprime Mortgage Meltdown feature.)
How do you find good foreclosure properties? Read on to learn more about how to uncover winning foreclosure deals.
Take the Best and Leave the Rest
The first step toward successfully finding foreclosure properties is to clear your playing field of properties that will never earn you back the time, money, and/or effort you put into them. Some properties may seem like a great bargain, but there may be a reason why the price is so low: undesirable location, for example. A little research and common sense will help you determine whether you should proceed or walk away. (To read more about renovations, see Fix It And Flip It: The Value of Remodeling.)
Here are some red flags that may indicate a property you'll want to avoid.
- There's a lack of owner pride in the area. If you see that many lawns are un-mowed, trees and foliage are unkempt, and fences and other structures are in need of repair, keep moving.
- The area is a hotbed for criminal activity. You can get facts on crime rates in the neighborhood and immediately surrounding areas. You can also take a look at surrounding properties and neighborhoods for signs of vandalism and graffiti. No one will want a house in an unsafe area.
- Neighboring properties are abandoned. You should avoid a property if the surrounding buildings are boarded up or look damaged. There's probably a chance they've been vacant for a while, which is never a good sign.
- The streets are dirty. Let's face it: streets full of trash, littered with broken glass, and covered in oil and other stains aren't appealing to anyone, and they shouldn't be appealing to you as a deal hunter either.
- There's nothing to do close by. While this may sound trivial at first, consider the importance of having grocery stores, banks, pharmacies and other shops or facilities nearby. Having to travel for miles just to buy milk and get gas is a drag. Also pay attention to the condition of existing local shops. Do they look inviting, or are they dilapidated and unwelcoming?
- Getting places is hard. If there isn't easy access to major roads that lead in and out of the city or town, it's harder for residents to get to work and other points of interest. Also check out the condition of the existing roads. Are they well-maintained, clearly marked and relatively free of major traffic headaches? Or are they in disrepair, lacking clear signs and prone to regular traffic nightmares?
- The highway is too close for comfort. While you don't want to be too far away from major arterial roads, being too close to them is also something to avoid. No one wants the sights and sounds of a busy expressway right outside their window. Unless there's some sort of barrier (such as trees, a hedge, or a fence) blocking the highway from the sight and sound of nearby residents, it's a home to avoid.
- There are industrial sites nearby. There's nothing wrong with factories and industrial buildings, but no one wants them in their backyard. Make sure there aren't any industrial buildings nearby that could emit noise, smoke, fumes or other sources of unpleasantness into the neighborhood.
Now that you know what to avoid in a foreclosure property, it's time to learn what to look for. Up-and-coming foreclosure properties aren't necessarily perfect as they are, but, like a diamond in the rough, they really have the potential to shine with a little sweat equity. People want to live in clean, safe and convenient neighborhoods, and they're also willing to put in a little elbow grease to fix up properties in these neighborhoods.
If you can find a fixer-upper foreclosure property in a great location, you have the potential to make a big profit if you market it properly. Here's a list of the locations with the biggest upside potential.
- The homes are in a well-established neighborhood. You should look for older homes that are clean and obviously well-kept by their owners.
- The neighborhood is clean. The age of the neighborhood doesn't matter as long as it sparkles. You won't see trash in the streets, unkempt yards or other signs of neglect in these neighborhoods.
- The neighborhood is aging - in a good way. If a neighborhood is well maintained, it will age well. Look for tall, full trees as one sign of neighborhoods that are aging gracefully. You can also research the houses in the neighborhood to find out which ones have changed owners at least once already.
- The neighborhood shows signs of continual improvement. Look for signs that people have improved their homes: add-ons like decks or sun rooms, additions, extensive landscaping, or new siding or other improvements to appearance.
- There are things to do close by. Stores are easy to get to and are nearby, and a variety of important amenities are available. Make sure that shopping complexes and other facilities also look well maintained, safe and welcoming.
- The property doesn't need major work. If the improvements to the home are mostly minor and/or cosmetic and would serve as upgrades rather than full-on rehabilitation, go for it. A general rule is that fix-up costs should be within 5-10% of the purchase price.
- The structure is sound. A solid foundation is essential for any new relationship - especially the one buyers have with their new home. Make sure there are no major structural problems like damaged foundations, masonry, signs of sagging or problematic settlement.
Research Before You Buy
To be a wise foreclosure investor, you'll have to do some research and legwork to discern which properties are cash cows with lots of potential and which aren't. And of course, you should rely on a good dose of common sense, too. With a little effort on your part, you'll soon find your own diamonds in the rough.
To keep learning about this subject, see Investing In Real Estate.