The time has come for me to provide some perspective on foreclosures.   Everyone seems to be calling my office these days looking for the new foreclosures, hence here are some points to ponder when looking at your real estate investment portfolio.

Are foreclosures a good investment?

“Of course” is the answer most people spout off without much consideration.  My response is “it depends”.  People in our society have gotten on this crazy band wagon of believing foreclosures and REO’s are the key to their real estate wealth.  An astute business investors realizes this is not a guaranteed money maker and thus the reasons below illustrate why foreclosure fever may be more emotional frivolity than sound fundamental business.

1. Realize that foreclosures are being foreclosed on for a reason.  That home or lot didn’t just end up back in the banks hands by mistake.  A few things happened along the way that we need to remember.  Most of the time these foreclosure properties sat on the market as active listings prior to this period.  The previous owners tried to sell these properties, and agents had them listed.   Here are a couple of leading reasons they didn’t sell.

a. The properties had been purchased at very high prices in the market when everything was “blowing and going”.  Hence, the owners can only cut the price to a loss level of purchase price minus initial cash.

b. The property may be sitting there because it is less desirable than other non-foreclosed properties for most consumers.  Functional obsoleteness’ often becomes the primary culprit. The one bedroom 1 bath home with 2 levels isn’t exactly what most people are looking to buy.

c.Banks are typically inclined to make a habit out of losing money. Well, until the past year, but that is another article.  If a bank believed they could sell a product for more money they would most likely do so.

d.Foreclosure properties often lack the maintenance a non-foreclosed property receives.  Thus, they are typically many hidden repairs that will have to be made one does not expect.

Remember the best value may be the home sitting for sell 5 houses down from the foreclosure property.  Why is that the case?  The owners bought at a great value years ago, they don’t owe very much money to the bank, and they are simply ready to cash out and move on.  FYI, they may even make a profit.  The “foreclosure nut” may say “if they are making a profit I am not getting the best buy”.  Don’t be a foreclosure fool, remember it is about buying value not emotional hype.

Recap

Sure foreclosures may be a good investment, but like any investment you need to analyze from a value perspective rather than a label like “Foreclosure”.   Remember, the best buy may be that property for sell that is not in foreclosure.   I can guarantee that many will fall victim to the “Foreclosure Fever”.