One way first-time homebuyers can keep housing costs down is to get a great deal on a foreclosure. Right? Wrong, says author, real estate attorney and investor James Randel.

"First time homebuyers have their own issues," says Randel. "To put foreclosure risks on top of that is imprudent."

"Buying foreclosures isn't as easy as it looks," says Randel, "There are a number of risks associated with it."

People think foreclosures are a goldmine, low-hanging fruit, but the only ones who tend to do well are experienced buyers and professionals who treat buying foreclosures as a business.

According to Randel, here are the top five reasons why foreclosures carry too much risk for first-time homebuyers.

1. Damaged goods. When people get in trouble, they tend not to care for the property. And because of anger and frustration, they may damage the property deliberately.

2. As is, where is. In a normal transaction, there are seller's disclosures. Sellers are liable for fraud if they lie, but that due diligence doesn't exist in foreclosures because there is no contract with the seller.

3. No Title, No Recourse. You get a title search in a normal transaction after your offer is accepted. In foreclosures, you do the title search before your bid is accepted. "If you don't do the title search, you may prevail at the auction but be subject to superior liens like tax liens," warns Randel. "People say, 'I may not get the deal so I don't want to spend the money for a title search - that's backwards thinking."

4. Evictions. You have to determine the homeowner is out of the property. The homeowner may still have personal property or still live on the premises, and it could take time and money to get rid of them.

5. Bidding Fever. Auctions are designed to get you excited. Some people don't go mentally prepared to an auction in the right way. The auction could take place on the courthouse steps or in a courtroom, but the tempo matters. If it's fast-paced, don't get caught up in the excitement and energy or you're likely to overbid.

"The best way to buy a foreclosure is to let the bank take title and try to buy directly from the bank -- before it goes on the auction block. Those properties are called REOs, real estate-owned, explains Randel. "If that's not possible, prepare for an auction. There are websites that notify the public when a lis pendens (pending action) has been filed. That's a notice of foreclosure.

"I recommend to investor clients to get to know bankers in your geographic area, and they'll tell you this property has problems."

The best short cut to buying a foreclosure is to work with a Realtor who knows the market and can help you pick the right property for your needs.

Published: May 27, 2008

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