Foreclosures are not the easiest form of investment property to break into the business with, and thus really should not be your first foray into property investing. They can be quite confounding, and buying foreclosures typically do not follow the normal rules of supply and demand, as well as negotiating. Therefore, it’s a highly specialized niche, usually reserved for the experienced investor.

I have previously written here that a “foreclosure occurs when an owner has defaulted on their mortgage loan, usually from not making timely payments to their lender, and their lender then goes through the legal process of taking title to the property. So foreclosures always involve the sale of bank-owned property (unlike short sales, where the bank does not have legal possession of the owner’s property).”  Nonetheless, if you’re considering buying a home after foreclosure in order to invest in it, there are a few tips to keep in mind – so you don’t lose yours along the way.

I have noted before that “when deciding if you should potentially bid on a foreclosure, keep in mind several key factors. Like short sales, you’ll be dealing with the bureaucratic red tape of any bank’s large portfolio of foreclosed properties. Thus, the time from making an offer to getting it accepted and then ultimately closing on the property can be 4 to 6 months on average. Sometimes longer. So you’ll need to be patient, and not worried about exactly when you’ll be able to gain possession (unlike most home buyers). You’ll also be competing with the pros, other real estate investors who have the knowledge and patience to deal in foreclosures.

In addition, like short sales, it will be most helpful if you’re paying all cash, or can at least remove any mortgage contingency. However, banks are always looking for pure cash buyers first, to help reduce their risk of any potential deal falling through. They will accept offers with mortgages, but the offer will have to be substantially greater than any all-cash offer they have on their property to offset the increase in risk for the lender, in case you don’t ultimately qualify for a loan (especially in the current tight credit atmosphere).

Also like short sales, don’t count on making a steal on any property. Banks have foreclosure property managers that set the asking price on sometimes hundreds of properties in their portfolio at any given time. And if their initial pricing is off on a property, and the house hasn‘t received any offers, these managers tend to stick to a set schedule of price reductions, based on time and percentages. So, for example, if a house has been sitting for 30 days without an acceptable offer, the bank will, on their prescribed time schedule, automatically reduce the asking price – and usually no more than 10% at a time. As time passes and the house still doesn’t get a proper offer, the bank will wait until their next time interval for a price drop to occur. This is quite different from an average property owner, who can drop the price at any time, for any amount they choose, on their own house.”

Usually large chunks of foreclosed property inventories held by a lender, whether it be a local or regional bank or Fannie Mae, will get apportioned out to local, trusted real estate agents who have a track record working with that particular lender in their area. These agents will become the listing agents for each property the bank needs to place on the market. And it is these agents that act as the de facto gatekeepers for each foreclosure. Unlike any other type of real estate that’s placed on the market, where a listing agent deals with a particular seller of the property one on one, the listing agent for a foreclosure deals with a mass of bureaucracy. Instead of an individual, they deal with different contact people for the lender – each one with a specific responsibility.

Thus, unlike normal real estate transactions, where the listing agent is trying to get the best price and terms for their seller, a listing agent for a foreclosure does not necessarily have to obtain the best price for a property. But they operate, instead, under a completely different set of rigid rules they must follow. And if there’s one term that best describes dabbling in foreclosures, it’s “rigid rules.” In fact these rules are so complex and rigid, listing agents in foreclosures tend to be quite specialized, dealing only in representing lenders in foreclosures.

It is strictly because of this reason, when buying a foreclosure, you need to make nice with any foreclosure listing agent you’re considering making an offer to for one of their listings. Just to show you the interplay of rigid rules, as well as the lack of normal market conditions having little to do with the foreclosure process, let me offer an illustration of a recent foreclosure deal I had to endure, but in this case, I was representing the buyer.

In this real-world example of how to buy a foreclosure house, my buyer was not an investor. If he was, he probably would not have acquired the property. The lender in this instance was Fannie Mae, the Federal Home Loan Mortgage Co., responsible for buying up tremendous property inventory throughout the U.S. in packages of loans that get bundled together by banks. Fannie Mae issues specific guidelines to banks about the type of mortgage that can be considered available as a Fannie Mae product, including, for example, the upper limits on the amount of the mortgage.

In this example, any investor who made an offer on the foreclosure took a backseat -and had to wait a couple of weeks , per the rigid guidelines, before any other owner-occupied offer was either accepted or rejected. In this case, investors lost out due to the Fannie Mae rules: my buyer got in before them, made an offer, negotiated it, and got an accepted offer before any other investor offer could be presented. I was told three others had come in in the interim. One of the key issues to be concerned with, is that because my buyer was the first in with an offer, he received preferential treatment.

A couple of other non-investor offers also came in after ours (as I was told by the listing agent), but the lender only negotiated with us. This runs counter to how any good listing agent will operate with a “normal” seller. The listing agent wants to create a bidding war to help jack up the price he can fetch for his seller. Multiple offers are usually a boon, and treated as an integral part of the process when a listing agent runs the show on a bidding war. In essence, the listing agent controls all the negotiations in order to get the best price for his seller. But not so with foreclosures. Please understand this.

As a property investor looking to learn how to buy a house in foreclosure, this example case is very enlightening.  In this example, if you made an offer, you just wasted your time. This is one of the many pitfalls of buying foreclosures. Another great pitfall is that you must make your offers based on buying the property in strictly “as is” condition. And if you’re buying in the middle of winter, and the water has been turned off, you won’t be able to test the plumbing system for leaks, water pressure, etc. In addition, most of the time the electricity is off, so you won’t be able to test the electrical system or appliances either. So, you’ll need to bracket a large amount for anticipated, unseen but probable repairs. And you’d best know how to estimate properly, otherwise, you could be stuck acquiring a money pit that could seem endless, and ruin you financially in the process. This is yet another reason to gain some experience in acquiring properties first before you even consider attempting to invest in a foreclosure.

Returning to my example, even after we had a “deal, we never received the fully executed contract back from the seller. Since the seller is Fannie Mae, there are even more rules and regulations that are required to actually place the “offer” that was accepted by the listing agent! The paperwork goes through a series of departments and personnel, each creating a “pass go” scenario that, like dominos, allows the deal to go through, step by step. The listing agent for a foreclosure sometimes calls these steps “triggers” or trigger events. In essence, it is a time consuming process, and the entire time, you never really know for sure if you have a done deal.

Only when the attorney for the bank sets up a closing with the buyer’s attorney do you truly know you’ve got a deal that will actually make it to closing. As before, any property investor getting involved in foreclosures needs the right temperament to deal with the incredible frustration such a process can exact on a human being. Do you think you’d have the right temperament to handle a deal blowing up after putting so much personal time and energy into finding the property, evaluating it to make a proper offer, then following through and negotiating – only to say you’ve got a deal, now wait. And keeping your fingers crossed the deal goes through?… I didn’t think so either…

That’s why dabbling in foreclosures is best left to the experienced property investor who has the guts and patience to handle the inevitable frustrations of such a lengthy, potentially mind-bending experience. Each time out for that matter. In my experience, I have never purchased a foreclosure for all these reasons. I just felt, with an honest evaluation of my own temperament and personality, I would not handle defeat well…especially if it’s because of some silly rule that’s out of my control. Just be wary if you decide to get involved with investing in foreclosures.  Ultimately, if you ask how do you buy a foreclosure, I’d say very, very carefully.