Avoiding Pre-foreclosure Investment Mistakes

By: Robert Lam

I have been talking in previous articles about all of the incredible and exciting opportunities in foreclosures--and there are many! However, there are also things to watch out for. I wanted to share six pitfalls with you in this article.

1. Spotting a great opportunity... too late

When a bank issues a notice of default to a home owner who has fallen behind in their payments, this notice goes onto the public record. Not only is it filed with the county recorder's office in the relevant county, but it gets included on various foreclosure listing sites on the Internet. If you're not actively monitoring these lists, and then finally come across a great opportunity... it could be too late. Some other pre-foreclosure property investor may have already negotiated to buy the home by the time you've decided to contact the owner! You need to be on guard, pay attention and act quickly!

2. Failing to gain the trust of the home owner

Right now, pre-foreclosure and foreclosure property investing is one of the biggest games in town. So you can bet that distressed home owners are being harassed by investors promising them the world. Unfortunately, this includes various scam artists and wannabes who can't fulfill their big promises. That leaves home owners more skeptical than ever, so if you don't do all you can to prove that you're legitimate... you may lose the deal before you've even stepped in the home owner's door. Build rapport with the homeowner. Sympathize and emphathize with thier situation and help them feel like their situation is not unique and there is a solution!

3. Incorrectly valuing the property

Your ability to profit from a pre-foreclosure deal largely rests on achieving a big enough margin between the market value of the property... and the price you can get it for. While you can hire an appraiser to get an appraisal of the the value, it really rests on you to get this right. You need to consider the market values of similar properties in the area, as well as the condition of the home. You also need to take into account any liens (unpaid property taxes, utility bills, etc) that may attach to the property. If you misread the value, you could get yourself in trouble. As a rule of thumb, you want to make sure that you're getting such a good discount that you could sell the home now OR in the future, and still make a profit. If you are not sure, consult with a few realtors in town to better understand what is going on in that particular neighborhood or area around the property.

4. Making an offer that's too low... or too high

Make an offer that's too low, and the home owner will simply reject it. Remember, they want to get some equity or at least settle their debts with the price you offer. On the other hand, if you offer to buy the property for too much, you could erode your own ability to profit. This is goes hand in hand with the previous item where you need to know the values first. You need to know the repairs and your profits. Know your numbers and you can't go wrong.

5. Failing to properly finance the deal

You also need to finance the deal. The last thing you want to do is to get yourself into financial difficulty by taking on a loan that YOU can't sustain! This comes with networking with lenders, mortgage brokers, realtors and other investors. Talk to your power team around you and make sure you have your financing in place to purchase the property.

6. Not learning from others

Learn from others who have already experienced the pitfalls firsthand such as what is described in and in the resource information below. Trial and error is the most costly way to invest in real estate because there is such a wealth of information out there that you have at your fingertips to save yourself from setbacks.

These pitfalls may seem basic... but it's often the basic things that get missed when you're eager to find the next best deal. By all means stay enthusiastic... but also be aware of the foregoing pitfalls. That way you'll be in good shape to find profitable pre-foreclosure properties to invest in.

Foreclosures
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