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Beware of Uncle Sam’s bargain basement

The foreclosures market is known for being fraught with risks: decrepit money pits, drawn out transaction processes, and troubled tenants who refuse to move on and out. Rather than creating more prudent investment opportunities, however, the torrid market of the past five years is now adding new levels of unsecured risk, leaving even fewer genuine deals out there.

Most repossession opportunities are seized by insiders long before they reach the open market, and of those that do make it, many are already earmarked by the auction 'brigade'; cash-heavy investment vultures who sit ominously, waiting to feast on any turnkey leftovers.

What differentiates them from the lay investor however, is their wealth of knowledge and collective expertise. They have experience in emerging market financial crises and, more importantly, have the discipline of only paying bottom dollar.

Sure, armed with enough time to pick through the property detritus, and with a battery of advisers at your beck and call, you might be lucky enough to grab yourself a bargain. But the chances are slim. 

So, should we rule out making any genuine gains from distressed purchases? The rate of forced sales suggests that there are still opportunities out there, although the recovering US dollar and uncertainty in capital gains mean it's not quite the foreign buyer's bonanza it once was.

But with the banks' inventory of sales piling up as properties fail to sell the lenders will have to discount their prices further in order to unload their ever enlarging lists.

Choosing where you invest is critical. In states where real estate prices have risen the most including Arizona and Virginia, foreclosure properties are often still selling within 5 to 10% of full asking prices. The inevitable costs of renovating and repairing properties in these prime spots are appreciably higher too.

Above all, as a buyer, you need to be fully conversant with the foreclosure purchase process. Auctions, while increasingly commonplace, are risky environments for the uninitiated. Not only are you buying the property unseen, you will also be liable for any outstanding taxes, liens or second mortgages with no valid home warranty to cover the cost of any 'hidden' damages.

The alternative real estate owned (REO) transactions repossessed by the bank, are a less risky option. The transaction process can take several months, with the lender often sitting on multiple offers, hoping to squeeze a little more out of the exchange.

Is there a middle ground? Yes, if, for example, you let bank managers and estate agents in your first choice area know that you are a solvent buyer and in a position to move quickly. That way you might find a distressed vendor prepared to discount heavily for a speedy sale to avoid the costs of repossession. Only then, as they say, will the price be right for everyone.