Can I use the $8,000 home buyer tax credit to get a really cheap foreclosed property for free?

David asks: I am 22 and just graduated from college. I was thinking about purchasing a foreclosed home for around $8-10k and using the $8,000 first-time home credit to essentially get the house for free. Will this work? I have no job at this time but I have perfect credit. I have about $3k in extra cash. I was thinking about buying a house in Detroit or Florida.

You seem to have stumbled upon an interesting idea, but unfortunately it won’t work.

The tax-credit you’d be eligible for is 10 percent of the home purchase price up to a maximum of $8,000. So if you bought a $10,000 home, you could only claim a credit of $1,000. You would have to buy a home that cost $80,000 or more to get a credit for the maximum $8,000.

Even if the law would allow you to buy an $8,000 and get the $8,000 tax credit (making the home free), an $8,000 property—even if it were actually free—is going to cost thousands (if not tens of thousands) to do anything with. Live in, flip, etc.

Properties this cheap (even in tanked real estate markets like parts of Florida and Michigan) may need to be torn down and rebuilt. Even if they’re structurally sound, they may not be inhabitable. I’d stay far, far away.

Finally, buying a foreclosed home is not as easy as many make it seem. Banks can take months to get back to an offer on a foreclosed home—if they respond at all. Any foreclosed home that’s a really good deal will attract plenty of investors and home flippers who know what they’re doing, so you’ll be competing with strong offers (usually cash). Finally, there’s the title problem.

With many of today’s foreclosures, the mortgages have been split and sold so many times, it’s unclear who actually holds the title. In many states, people have bought foreclosed homes only to learn that the seller never had the title. The result? The buyer is stuck with a home that they can never legally sell again—or worse—that a legitimate owner may be able to claim from them someday.

At the moment, I’d focus on getting a job (which mortgage lenders will absolutely require; they won’t lend to somebody with perfect credit if they don’t have an income). Once you get that nailed down, if the tax credit is still available, I’d try to buy a really inexpensive property, but not so cheap that you’ll spend more than the purchase price making it livable.