What is foreclosure investing?
Foreclosure refers to a legal process that occurs when a homeowner (borrower) is no longer able to make their mortgage payments. At this point, the lender puts the house (used as collateral for the loan) back on the market to retrieve the loan balance. Through this process, the lender will be able to minimize any loss as a result of the defaulted mortgage.
Having said that, foreclosure investing is the purchase of foreclosure homes and turning them for a profit. After buying a foreclosure home, a real estate investor can decide to fix it up before reselling it or rent it out.
Foreclosure investing has become more popular in recent years. However, is it smart to buy a foreclosed home? There are many misconceptions about foreclosure investing that have made some real estate investors scared of investing in them. However, the truth is that investing in foreclosed homes offers some unique and great opportunities. Nevertheless, it is important to be aware of both the pros and cons of foreclosed homes before you dive into the world of foreclosure investing. Those capable of capitalizing on the benefits of foreclosure investing while taking proper precautions can gain good returns. Today, we will look at the benefits of buying a foreclosure for investment.
The Benefits of Foreclosure Investing
The following are 6 common benefits of investing in foreclosed homes:
1. Discounted Price
The sellers of foreclosed homes, who are also the mortgage lenders, are usually motivated. They need to quickly sell the property and recoup the loan balance. As a result, they will lower their prices so as to get multiple offers and facilitate a faster deal. Moreover, foreclosure properties are cheaper because they are often in a distressed condition. They are usually sold below market value, sometimes 20% to 50% lower than other properties in the same neighborhood.
With good research, you can find cheap real estate in a good neighborhood that can have a great appeal to prospective tenants. You could also make a lot of profit by immediately selling the investment property.
Essentially, a lower property price increases the potential of generating a higher return on investment. Due to the discounted prices, foreclosure investing helps to open up investors to real estate deals that might otherwise be unavailable to them.
2. Equity Building
Another benefit of foreclosure investing is the buildup of equity. If you buy a foreclosure below market value and the value of all the homes in that neighborhood increases due to development, you accumulate more equity than the neighbors. Of course, there are no guarantees that the value of homes will rise over the years. However, with foreclosure investing, the odds are better. Since foreclosures are bought “as is”, they also usually require renovations and repairs. After closing on a foreclosure, you have the opportunity to renovate and upgrade it the way you want. If you can cost-effectively renovate the home, you can significantly increase its value and even demand higher rents.
Related: What Is Equity in Real Estate?
3. Quick Buying Process
As mentioned, mortgage lenders are usually looking to sell the foreclosure homes as quickly as possible so as to retrieve as much of the unpaid debt as possible. Therefore, if the price is right, foreclosure real estate deals tend to close quicker than the traditional way of buying an investment property. It is unlikely for the seller to back out at the last minute. You become the owner of the property once the paperwork is done. Therefore, you can start earning monthly rents much faster.
4. Relatively Less Competition
It often takes more work to find foreclosure real estate than it takes to find regularly listed properties. So, not a lot of property investors bother going after this type of investment property. It is also less competitive because most foreclosures are usually auctioned to cash bidders. The opportunity of many buyers to purchase is reduced in cash auctions. This is because very few buyers can finance the property completely by themselves. If you know how to find foreclosures and can pay cash, then you have an added advantage. With traditional financing, a foreclosure property on auction would have far more offers.
5. Lower Settlement Costs
With foreclosure investing, you can also use regular mortgage financing. If you are buying a foreclosure with a loan, you get to borrow less money since the properties are below market value. Moreover, if you are buying foreclosed properties directly from a bank, you might be able to negotiate lower down payments and lower closing costs. Down payments are typically a serious hurdle to most new investment property buyers. Most mortgage lenders require buyers to make down payments of 10% to 20% of the property’s purchase price. Due to the lower price tags of foreclosures, smaller down payments will be required during purchase. This makes foreclosure investing a great opportunity for beginner real estate investors to get started in the rental property business.
6. The Title on the Home Is Clear
When purchasing an investment property from another person, the title of the property may have liens, mortgages or back taxes from the previous owner. However, when buying a foreclosed home, the title is usually clear. As part of the legal process, all issues with the home’s title are usually removed before sale. Therefore, foreclosure investing leaves you with only the property’s condition to worry about.
The Bottom Line
Foreclosure investing can be a lucrative investment strategy for both new and experienced real estate investors. However, there are also some pitfalls that should be considered. To ensure that you are making money from your foreclosure investments, you need to learn how to buy a foreclosure for investing. Unlike buying a home to stay in, you need to put your emotions aside and do proper due diligence before making a purchase. You should carefully research the local demographic, economic, and property trends. You also ought to factor in your repair expenses and the influence they will have on the overall value of the investment property.
There are a number of sources where real estate investors can find foreclosed properties for sale, each with its own advantages and disadvantages. One of the best ways to find and analyze these properties quickly and easily is by searching on Mashvisor.
To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.