Things to consider when purchasing a foreclosed property as an investment

Evaluate the rental market:

Every investor should evaluate the rental market in the area of the foreclosure.  If the neighborhood has a hundred vacant homes, there is a good chance the area has little demand for rentals.  In this case, there is a slim chance for any return on investment and you are throwing away your money.  If the demand for rentals is high, there will be less of a lead time to fill the vacancy and a value added from the desired location.  The best way to evaluate the market is to contact a property manager in the area and ask how the rental market is.  What is the average vacancy rate?  Are sellers turning their property over to a property management to rent because they cannot sell?  The more demand, the better return on your investment

Has the foreclosed property been well maintained by previous owner? 

This is very important and should take some thorough investigation.  Some home owners who lost their property to foreclosure most likely did not have the funds to keep the property well maintained.  If an investor buys a foreclosed property without researching the history of the house and the owner, they could end up having to pay thousands of dollars in repairs.  There could be electrical damage, broken pipes, roofing leaks, holes in the walls or doors, broken windows, etc. which can add up very quickly.  

Was the property used as a rental property in the past? 

If the home was a rental before, there are a few extra items the investor should consider.  Rental properties typically experience more wear and tear damage that could add to the investor's expenses. There is also a chance the investor may have to deal with current tenants.  Although it is very rare, situations may arise where the previous tenants are still living in the foreclosed property.  Although leases are considered an encumbrance to the property, tenants have very little rights with regards to protecting their lease when a property goes into foreclosure. (An encumbrance is any right or interest that exists in someone other than the owner of an estate and that restricts or impairs the transfer of the estate or lowers its value.)

Every state law differs, but the majority of the states follow the "first in time, first in right" rule.  This law states that if the mortgage was recorded before the lease was signed, the lease becomes obsolete.  However, if the rental agreement was signed before the mortgage was recorded; the renter may have a chance of protecting their lease, or at least delaying the eviction process.  In the rare case that a tenant is allowed to stay in the foreclosed property, the home buyer could be faced with some serious problems, especially if the tenants are delinquent in their rental payments. 

For more information on delinquent tenants and evictions, read Proper steps to evict a tenant.