Buying a foreclosed home could make for one of the greatest real estate investment strategies out there when planned correctly. While buying a foreclosed home might be cheaper as opposed to other types of real estate investment properties, it requires much attention, effort, and time from a real estate investor. This is because buying a foreclosed home can be a risky business. However, good research and planning will help you evade pitfalls and protect you against generating a negative cash flow.
Today, we will help you understand how to buy a foreclosed home while evading the risks associated. We will present you with 7 important tips that, if you take into account, will make your investment property a prosperous one.
But first, let’s explain what foreclosures are.
What Is a Foreclosed Property?
Foreclosure is the legal process by which a lender takes control of a property, evicts the homeowner, and sells the home after a homeowner fails to fulfill and pay full principal and interest payments on their mortgage. As stipulated in the mortgage contract, the lender has the right to claim the property in case the buyer fails to make their repayment obligation.
When the lender seizes the foreclosed home, they post it on their website and/or auction them in a foreclosure auction. Usually, lenders sell the foreclosed property at a discount.
For many real estate investors, a foreclosed home poses an advantage given that they tend to be below market value. However, real estate investors neglect that some foreclosed properties are distressed properties as they depreciate in value having been vacant for some time, thus incurring more costs. We are here today to make sure that you make the best decisions on a foreclosed property transaction.
Read the tips below to ensure you avoid pitfalls when buying a foreclosed home.
Buying a Foreclosed Home Tip #1: Study the Neighborhood
Our number one tip is to study thoroughly and evaluate the neighborhood which you are looking to buy a foreclosed property in. Look for other foreclosures within a certain neighborhood and run a neighborhood analysis. Often times, real estate investors neglect to look at similar foreclosed properties in a location and therefore end up struggling recouping gains. You might not be able to recover the cost of repairs if the value of the house is depressed due to many foreclosures within the area. Attending house auctions, moreover, will give you a better idea of the status of foreclosures in your area.
Related: Learn How to Buy a Foreclosure Home by Following These Steps
Buying a Foreclosed Home Tip #2: Do Not Purchase Foreclosed Homes That Have Been Vacant for Quite Some Time
As stated, you should certainly consider the amount of time a foreclosed house has been vacant. In most cases, the longer the home has been vacant, the more the damages. This makes sense because assets naturally get depreciated. The plumbing, for example, becomes a critical issue to consider as plumbing seals get dry with time. Moreover, the electrical and air conditioning systems become antiquated and more difficult to fix. The property becomes more of a distressed property that would need major renovations.
Buying a Foreclosed Home Tip #3: Consider HUD Houses
Consider investing in a HUD house. The Department of Housing and Urban Development currently holds approximately 39,000 houses whose previous owners held mortgages that were insured by the federal government. Usually, these houses are offered to the market after six months of foreclosure. This is because local governments get the upper hand to buy them. After that, buyers who plan to live in these houses get the second priority. If these foreclosed properties remain in the market ten days later, then real estate investors get to buy them. To learn more about HUD houses and their foreclosed houses for sale, click here.
Buying a Foreclosed Home Tip #4: Get a Private Inspection
Lenders require that borrowers and home buyers get a private inspection before approving a mortgage. However, note that conditions change dramatically and, particularly, if the house has been vacant for some time after it has been foreclosed. Any real estate investor should request a home inspection when buying an investment property, regardless of the type of property. A home inspection will cost you between $300-400 and it will provide a complete report on the structure, mechanical, and major components of the property.
Related: Buying a Foreclosed Home at House Auctions: What Real Estate Investors Should Know
Buying a Foreclosed Home Tip #5: Budget Carefully
Budgeting becomes essential when buying a foreclosed home. You need to carefully assess all the repairs that you will make and enumerate all expenses. Do not assume expenses. Go out and inquire about plumbing expenses, electrical, and any other arising issues. Additionally, we recommend that you take into account any contingencies that may arise. Put aside money for contingencies so as to avoid eventually generating a negative cash flow.
Buying a Foreclosed Home Tip #6: Be Ready for All Complications That May Arise
Sure you can purchase a foreclosed property for a price below market value. However, beware, because buying a foreclosed home is accompanied by many complications. Complications should not scare you if you thoroughly study the property before investing in it. Aside from the repairs that we have already talked about, time delays make another complication that you should note. Since banks are the sellers, they won’t come to the closing table as a private seller would. Instead, paperwork might need to be mailed to an office, looked over by a committee, and finally signed and approved. Be patient as the process might take longer than the traditional deals.
Related: Buying a Rental Property: Should You Go For One Expensive or Two Cheap Properties?
Buying a Foreclosed Home Tip #7: Seek out Information on the House’s History
Many states require sellers of real estate property to complete a Seller’s Property Disclosure Statement (SPDS) as part of any transaction in real estate. The statement reveals of any known material defects related to the property while providing a complete historical perspective of the property, its maintenance, and any repairs done under the previous ownership. However, this statement has many exclusions, one of which is when a foreclosure occurs. The historical perspective is lost because the bank now owns the property. Therefore, we recommend that you seek out information on the property’s history. Speak to the neighbors about the history of the place. If possible, get in touch with the previous owners and inquire about the state of the property.
Finally, we hope you are ready to venture into buying a foreclosed home. If you follow the aforementioned tips, we ensure that you will make viable decisions. Furthermore, we recommend that you do further investment property analysis. Learn of the neighborhood’s other foreclosed properties and run metrics such as cap rate, cash on cash return, and return on investment. At Mashvisor, we can assist you with these metrics when you use our investment property calculator. Our investment property calculator will ensure accuracy while calculating numbers for you to better assess the viability of a foreclosed property. Visit Mashvisor to learn more.
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