Are you thinking about buying a foreclosed home (also called a Real Estate Owned – REO)? While there is some potential for great deals, you need to educate yourself on the complexities of buying foreclosed properties. Some factors you should consider:

Will This Be Your Primary Home or an Investment Property?

A foreclosed home may require some fixing up, so you shouldn’t count on flipping the house for a profit. Also since home prices in some areas may not bounce back for awhile, you need to make sure you can profitably rent the property.

How Solid Are Your Finances?

Foreclosed homes can come with surprise expenses. Therefore, you need to do your homework about the market and the property. Areas with a surplus of foreclosures signal a declining market with the risk of further property value declines. Also some properties can have titles that are burdened with judgments, liens, late fees and other fines and attachments that you may have to pay off. So make sure you’re getting a clear title that has no issues and all liens have been released.

If you’re considering purchasing a property that is in less-than-mint condition, you need to realize that most banks sell REOs as is. Only in about 25% of cases will lenders fix some of the home’s issues before the sale closes. Therefore, you need to budget accordingly if the home requires some work.

Get Pre-qualified for a Mortgage

You should talk with an experienced lender to help you determine a good estimate of the actual home price. Also, your lender will help you figure out what you can afford for a monthly payment.

Hire Experts Experienced with Foreclosed Homes

It’s a good idea to make sure that you hire experts who are experienced with foreclosed homes to guide you through the process and any paperwork. This includes a reliable real estate agent and a trusted attorney. Never buy a foreclosed home by yourself.

Additionally, since many REOs may have been vacant for several months and can be in bad shape, you need to tour the property with a contractor to help you spot problems and determine how much it’s going to cost to fix them. Since the bank will likely sell the home as-is, you need to be well-informed about any major repairs.