The word ‘foreclosure’ automatically equates to ‘great real estate investment’ in many peoples’ minds. However, those that have experience in the foreclosure market will tell you that there can be just as many risks as rewards when buying a bank foreclosure.

If you’re not careful, a foreclosure can end up being just as costly as any other home on the market, sometimes even more in the long run.

REO Strategies — Turning the Bank’s Loss into Your Gain

As with any real estate purchase, proper thought and planning beforehand will go a long way towards making sure that the home you buy is a good investment. Unlike some sellers, banks are highly motivated to sell their REO properties which works to your advantage.

However, there are a lot more factors working for and against you. The more aware you are of the opportunities and pit falls the more likely you are to come out ahead.

Know Your Real Estate Market

Because bank owned homes are priced to sell, you may be able to find a home that’s below market value. This translates to instant equity in the home. However, unless you know your market well, you won’t know if the price is above, below or right on par with market value. If building equity is one of your main objectives study the real estate market first. Take note of the trends, price ranges, and recently sold homes to gauge the market value of an area. Don’t forget to consider the condition of the home and how that may have affected the selling price.

Don’t Be Afraid of Bank Owned Homes in Need of Repair

Bank owned homes are typically sold as is, which means they won’t negotiate to make repairs. What you see is what you’re going to get. Oftentimes bank foreclosures aren’t in the best condition, but that shouldn’t scare you off. One of the quickest ways to boost equity in a home is to improve it. Buyers can see big returns on updates and cosmetic fixes in the kitchen, bathrooms, floorings and landscaping. However, homes with foundation issues, a roof that needs to be replaced, and other structural problems are ones to avoid.

Get in on Bank Foreclosures Before Other Buyers

Before a home gets put on the market as an REO, the bank will first hold an auction to sell the property. Sometimes these auctions are highly competitive, sometimes no one makes an offer at all. In a bank’s auction process, the minimum bid starts at the balance owed to the lender, plus any associated attorney’s fees and other charges. However, the trade off is that at this point the bank hasn’t cleared the property of liens. A bank auction could land you the deal of a century, you just have to do a lot of research first to make sure the property come with liens attached.

Hidden Bank Foreclosures

With the slump in home construction and sales both, many builders are reaching the end of their home-construction loan terms with no buyers on the hook. Many brand-new properties are in the foreclosure process, and the banks will attempt to sell them through a real estate agent. They can be harder to smoke out through bank foreclosure listings, since nobody associated with the property wants it known that it’s actually a foreclosure.

Always Opt for the Home Inspection if You Can

Having a home inspection is always recommended, no matter whether it’s a foreclosed home or brand new build. As mentioned above, some issues such as a cracked foundation can cost you tens of thousands of dollars. The good news is, if a home inspection turns up any problems that you aren’t comfortable with handling and the bank won’t fix it for you, you can back out of the contract.

Redemption period

Be aware that in most states there’s a redemption period in which the original owner can take back possession of the home even if it’s already sold to someone else. This isn’t very common since the original owner has to pay off the balance of the loan they defaulted on in full in a relatively short period of time, but it does happen. Before buying research your states foreclosure laws to gauge the redemption risk-level. And don’t make any repairs to the property until you’re out of the redemption period.

Enlist the Help of a Foreclosure Agent

Foreclosures are involved legal processes that most people never have to deal with or worry about. A good foreclosure agent is worth their weight in gold because they have insight and experience that can only be gained by going through the process. Another big benefit; they get compensated for their services through seller-paid commissions, so you have everything to gain and nothing to lose by working with a foreclosure real estate agent.

Start following the bank foreclosure listings in your area, and sign up for a service that will regularly give you updates of the properties in your area. It will take diligence, patience and persistence, but it could well pay off.