Wednesday, March 5, 2008

Buying a house for $10? Where’s the catch?

I was watching CNBC over the weekend and I saw a paid advertisement about investing in foreclosed properties, where investors have supposedly bought houses for less than $1000. It did grab my attention, until I turned off the TV and thought that this is too good to be true.

I did some searching on the web and found an interesting article on people who are supposedly cashing in on foreclosures on CNN’s website. What was particularly interesting to me though, was a calculation about a couple who bought a house in 1998 for just $10. Currently the house was appraised at $250,000. This sounds like a big return on investment, doesn’t it?
Actually there’s always a catch with such “extraordinary deals”. When Mary Krawiec and Mark Peabody scooped up a nine-unit Victorian in Troy, N.Y, they had to do 9 renovations. At the time of the publication they had renovated 4 of the unit and had 5 more to go. They had to pay $2000 for a water bill including previous owner’s debts, replace the cracked rubber roof for $3,500, install new carpets, patch and paint wll and ceilings. They also had to renovate bathrooms; kitchens put new boilers and install special order thermal pane windows. The total expenses to data plus all the projected expenses totaled slightly over $71,000. CNN calculated the profit (rents minus taxes, insurance, utilities) at $52,000, which represented an annualized 27% return on investment, which definitely beats the stock market over the same period.

Forecloses have been on the rise across USA for over a year now. One might be able to scoop up properties at what might seem as bargain prices, but there’s always a catch – there is a very high possibility that the previous inhabitants of the house are behind on utilities, property taxes. In addition they might not leave the house in a perfect condition but in a very bad one because of their desperation. As usual, my advice is always to do your own due diligence before investing any money in anything.

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