Everyone knows that the real estate market is feeling a pinch, and that's putting it nicely. The market has become flooded with foreclosures and short sales. Many people finding a home right now are looking for these properties because they believe that they are getting a deal when they purchase them, but it is not always so. Few people know the truth about buying foreclosures and short sales and many will end up losing a lot of money on what they believed was a good deal originally.
Let's start with foreclosures, as these are the deals that most buyers assume are the best ones.
1.) The bank has their own addendums to the contract that obviously work in their favor. You will be buying as-is, but unlike buying from a regular owner, banks will rarely, if ever, lower the price or give any money for the repairs that you find. Most owners are willing to help out even on an as-is deal. Now, pretty much all foreclosures have numerous problems that will need to be repaired, as people that foreclose do not generally have the money to maintain their property. I have yet to see even one in halfway decent condition. Unless you are a contractor, this will be a major overhaul and usually cost you double the money and time that you think it will.
Even most good inspectors rarely catch every single thing that's wrong. Example, some of my buyers found a house for $300K that had a new roof, new electric, new bathrooms, new kitchen, and new everything else, plus it was being sold by a regular person. They also looked at a house that was a foreclosure for $249K (banks are also not willing to go too much lower than their asking price). The foreclosure needed major work, I have been doing this long enough to tell by looking at it. They pretty much would have to redo the whole thing. They believe that they could do this for less than what it would cost to buy the finished house.
Kitchens and bathrooms alone will usually run about $30K, and more for the new roof, the obvious foundation issues, etc. Ninety-nine percent of foreclosures will have major repair issues that will cost far more and take longer than you could ever estimate. Many need new electric and plumbing, which also costs a fortune. I have met many beginning investors or families who have mistakenly bought foreclosures and it is the same story each time. One of my best friends also went through this and it cost him three times what the estimates were and took him over a year to finish (he had originally anticipated one month)! Unless you are a contractor and can do all the work yourself, you are not getting a deal.