Buying foreclosures for investment has a number of financial benefits. For example, foreclosed homes for sale are usually priced below market value. Lenders often sell foreclosed homes for much less than what they might be worth in an attempt to quickly sell them and recover their money. Moreover, there are a number of real estate investment strategies that can be applied to foreclosure homes; they provide an endless source of investment possibilities.
Therefore, searching for foreclosures for sale can be a smart move if you want to buy an investment property. You can find foreclosures for sale from a number of sources. These include newspapers, foreclosure and other real estate websites, real estate agents, etc. However, not all will be good investment properties. That’s because, even though buying foreclosed properties to rent out or sell may seem easy, in reality, it is a more complicated process than most real estate investors think. Due to the risks involved, it will require more of your time, attention, and effort.
To avoid pitfalls and ensure that you generate positive cash flow, you will need to properly analyze foreclosures for sale in terms of location and cost. So, here’s how to analyze foreclosures for sale for investment to find the best one.
How to Analyze Foreclosures for Sale for Investment
1. Hire a real estate agent
Buying foreclosures is quite different from other types of property. Finding and analyzing foreclosures for sale can be quite complicated, especially if you are a first-timer. If you want to get the best deals, you need to hire a real estate agent who specializes in foreclosed properties. An experienced real estate agent knows exactly what makes for a profitable foreclosure deal and where to look for it. Moreover, real estate agents usually have access to information that investors may not have that would help in selecting the best investment opportunities.
2. Choose the Right Neighborhood
Location is a very important factor for successful real estate investing since it will affect your return on investment. Your knowledge of the market area where you want to purchase the foreclosed property will influence your success. The first step when analyzing foreclosures for sale for investment is finding the right city or state to invest in. After finding a profitable city or state, you can then narrow the location down to individual neighborhoods within that market. You need to study the neighborhoods to ensure that you pick one that is good for buying an investment property. Since someone is going to reside in that property, the property should be located in a good neighborhood that is conducive for tenants.
Some of the things to look at include the employment rate, population growth, availability of public transportation, crime rates, proximity to amenities like schools, zoning laws, etc. The neighborhood should have a demand for housing before you buy a foreclosure. This will ensure you can make money by selling or renting out the investment property. If possible, walk or drive around the neighborhood to find out as much as you can about it.
You can also find a good neighborhood by performing neighborhood analysis. This analysis will help you to determine the average performance of investment properties in a certain neighborhood and the market trends in that neighborhood. Cap rate and cash on cash return are the most common metrics used to determine projected returns of a location. Choosing a neighborhood whose median price is close to your budget will give you more options to choose from that are in line with your search criteria.
3. Perform Comparative Market Analysis (CMA)
Finding the right neighborhood to invest in is a good starting point when analyzing foreclosures for sale for investment. However, you have to drill down deeper to find the right property for you. There are usually several foreclosure properties for sale in the market. You should never settle for the first foreclosed home that you come across. To find one that matches your budget and other search criteria, you will need to analyze a number of properties.
First, you should do a comparative market analysis. This is the process of estimating the value of properties you are interested in based on similar properties in the same neighborhood or area that were recently sold. These properties that are similar to the subject property are referred to as real estate comps. You should check out the prices of at least three real estate comps and adjust for feature differences with the properties you are considering. This will help you to get a fair estimate of the market value of the subject foreclosure property. This way, you will be able to establish the right price to offer and ensure that you are actually getting a good deal.
A real estate agent can help you do this market analysis by looking at real estate comps. However, ensure that your agent is familiar and experienced with the local housing market as you want an accurate CMA. You can also use Mashvisor to quickly access real estate comps.
4. Perform Investment Property Analysis
The next step is to analyze the properties themselves. Through investment property analysis, you will be able to compare similar foreclosures for sale and find one with the highest projected returns based on your investment criteria. For the rental property investment strategy, you can use Mashvisor’s rental property calculator to quickly analyze foreclosures in the US housing market. With this tool, you can calculate the potential rental income, cash flow, capitalization rate, and cash on cash return of an investment property. These metrics give an accurate estimate of the return on investment of the foreclosed property.
5. Get a Home Inspection
When investing in foreclosed homes, repairs are almost inevitable. Therefore, getting a home inspection is a critical step when analyzing foreclosures for sale for investment. Before making an offer on a foreclosed property, it’s crucial to know the amount of work the foreclosure property needs. You should have an accurate picture of its value after completing repairs. The seller should allow you to bring in a professional home inspector to estimate the repairs.
A competent home inspector will help you to know if there are any deficiencies in the property by providing a complete report on the structure and main components of the property. He/she will also break down all the costs needed to do a home renovation. This enables real estate investors to know whether the foreclosed property will be a profitable one. If the property is cheap but has many faults that are expensive to repair, it could potentially turn into a money pit.
Note that depending on how you buy a foreclosed property (auction, bank owned, pre-foreclosure, etc.), you may or may not be able to get an inspection before making an offer.
The Bottom Line
Buying foreclosed homes can be a profitable investment strategy since they are usually cheaper than other types of investment properties. However, the opportunity doesn’t come from the price of the foreclosure alone. Even though foreclosure investing may seem like an easy way to make money, there is a lot you need to take into consideration. This is because buying a foreclosure is a complicated and risky process and you can potentially lose a lot of money. There are other important factors that will determine the prosperity of your investment property. You need to properly analyze foreclosures for sale to ensure that you get the best deal.