Due Diligence in Foreclosed Properties
Real Estate

Due Diligence in Foreclosed Properties

There are a large number of investment opportunities in foreclosed properties. The recent collapse of the mortgage industry stands as evidence of how many people have had their homes repossessed in recent years. As a buyer, this is a great time to buy foreclosed properties that will give you a tremendous return on your investment.

Many investors are quite savvy about the final numbers of the real estate investment market. However, they often lack the ability to carry out due diligence on the properties they are considering purchasing. Due diligence is the simple process of researching a potential investment to see how much it is actually worth. So performing due diligence on a home is simply the process of inspecting it to see what its true value is. There are several aspects to doing due diligence on a property, and many investors only do one or the other.

The first is the title search. You will usually need to hire a title search extractor to do the title search for you. After completing this, you will need to know how to analyze and process the information. A title search will provide a historical timeline of the property you are considering. You will be able to determine who owned it, for how long, and what they did there. This is a great way to identify potential problems that could one day negatively affect the value of the property. If there was a toxic waste dump on the site fifty years ago, you may want to reconsider.

On that note, you should always perform a records check for any environmental contamination. A title search will help start this process, but you should ask your local municipal clerk about the best way to access the registry of pollution reports. All of these should be public record and available to you if you are willing to put in the time and effort to dig them up.

Another part of due diligence is investigating properties in the surrounding areas. The sale price of real estate is a public record, so take the time to find out how much other properties in the neighborhood have sold for. This will help you estimate the current market value of the property you are interested in. Although it doesn’t happen often, sometimes the initial auction price set by the bank in foreclosure is actually higher than the appraised value of the property itself. The bank does this in an effort to claim the amount owed to them. You can’t just assume you’re getting a great deal because a property is foreclosed on. You should do your due diligence and compare three comps in the same area to ensure that you will be able to recoup your investment when you decide to sell.

Having completed the paper trail investigation of your property, you are now ready to take a closer look at the physical property itself. This is the part of due diligence that investors are either very good at or miss out on altogether. There are many subtle features of a home that can make a big difference in its resale value on the open market.

Inspecting for structural roof damage involves much more than simply looking at the roof and identifying a few shingles that need to be replaced. Either you, or the inspector you hire, should get on the roof and look for weak spots. You also need to enter the attic and inspect the roof deck from below. If you see areas where water has slid down the joists, you’ll need to make sure there isn’t dry rot somewhere on the deck. This can be expensive to repair and can take a big chunk out of your resale profits. If you suspect dry rot, you should also have the house checked for mold contamination before you bid at auction. If you’re hoping to buy a foreclosure and then turn it around quickly, then you should probably stay away from houses with structural problems. Again, take the time to do the proper due diligence to avoid being stuck with expensive repairs.

Another area that should be carefully inspected in your due diligence is the foundation of the house. Sagging or cracked foundations require careful inspection to determine the severity of the problem, and if you’re not comfortable identifying it, hire a consultant. Sometimes a crack is just a crack; while other times it can be a billboard advertising a house that is ready to fall. Foundation repairs can be very expensive, and if you don’t factor them into your investment plan, they can ruin not only your profits, but also the principal amount of your investment. In other words, be sure to go down to the basement, no matter how dark and damp, and carefully check the foundation.

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