Buying a foreclosed home can be a great idea as a real estate investment… if you know what you’re doing.
Foreclosed homes come with a number of challenges, and it is rare to purchase a foreclosed home without facing unexpected problems and obstacles along the way.
So, what are foreclosed homes, and what are the different challenges that you should expect to face when trying to buy one? Let’s find out.
Buying a Foreclosed Home: What Does It Mean?
Have you ever wondered what happens when a homeowner fails to pay its mortgage?
To put it simply, the bank (or lender) seizes the property from its owner and tries to sell it back in the market as a foreclosed home.
So, a foreclosed home is a real estate property whose owner could no longer afford to pay the mortgage, leading to the owner getting evicted from the property and the bank or other lender seizing ownership over the property.
But what does it mean for you, as a prospective investor interested in buying a foreclosed home?
Buying a foreclosed home can be a very profitable move, but only if it’s done correctly. So, before ever considering buying a foreclosed home, you should understand the different challenges that you would be facing.
Buying a Foreclosed Home: Expected Damage
One of the first things that come to mind when considering foreclosed homes is the expected state of the property.
Foreclosed homes are typically vacant homes, and in most cases have been vacant for weeks, months, and sometimes even years before being sold and occupied again.
This means that the property’s condition will, in most cases, be extremely poor. An investor who’s looking to buy a foreclosed home should expect the investment property to require an extensive amount of renovation and repairs.
Here’s a list of the problems that you might be facing when looking at a foreclosed home:
- Lack of cleanliness: The foreclosed property for sale will have gathered a large amount of dust and dirt, and it will probably come with a nasty smell.
- Bad renovation: Since the previous owner could not afford to pay the mortgage, it is safe to assume that he/she could not afford quality renovations of the house either. This means that you should expect the house to need heavy renovations even for parts that seem like they have been renovated.
- Electricity and Water: A foreclosed home will typically lack any electricity when you inspect it, so it is advised to bring a flashlight in order to inspect rooms with no windows or natural lighting. Additionally, any minor leaks that existed in the home before its foreclosure will have turned into disasters for the house, causing problems such as mold and wood deterioration.
- Yards and gardens: If the foreclosed home is surrounded by a yard or a garden, then expect to find yourself surrounded by either a jungle or a desert, depending on the region and the weather.
- Vandalism: Another thing to expect when considering a foreclosed home is finding a house that has been broken into, vandalized, or even written graffiti on all over the walls. This is because foreclosed homes are usually targeted by outlaws and broken into, and sometimes you will even find doors, sinks, and other parts of the house stolen by either thieves or the previous owners before they were evicted.
Buying a Foreclosed Home: Loan Difficulties
In addition to all the problems related to the conditions of the house, when considering buying a foreclosed home, you should also expect difficulties acquiring a loan for your purchase.
This is because most conventional lenders will refuse to provide a loan for an uninhabitable home or a property which appraises below the purchase price.
Additionally, when trying to purchase a foreclosed home, you should expect a number of delays as the different parties involved process the documents and provide their approvals, during which period you could lose your deal for a number of reasons.
One of the aspects of foreclosed homes is the high competition over them in the real estate market due to them offering great deals when planned correctly, and especially for fix-and-flip real estate investors.
As a real estate investor, one of the major advantages that you could have when competing over a foreclosed home is the option to pay all cash. This will give you an edge over other investors as your process of investing will not be delayed by getting a loan approved.
Another challenge related to foreclosed homes has to do with having no seller disclosure. This means that your only source of information about the property, its problems, and how it can be fixed will be through your own inspection of the property and/or from neighbors living in the area.
Buying a Foreclosed Home: Auctions
While it is possible to buy foreclosed homes in the traditional way same as you would buy any other real estate property, foreclosed homes that do not manage to attract buyers are often sold through an auction.
There are two types of auctions that sell foreclosed homes: a public foreclosure auction and a through an auction company.
It is possible to find foreclosure auctions by auction companies online, opening up the possibility to look for and purchase foreclosed homes through online sources. However, this comes with the downside of not being able to inspect the property prior to the auction, and having to rely on photographs and descriptions of the property to determine its condition and the costs of repairing and renovating it.
Buying a Foreclosed Home: Bottom Line
Foreclosed homes can offer great opportunities to real estate investors. These opportunities, however, are, more often than not, accompanied by a number of great challenges that may hinder the investment, delay it, or even make it an unworthy one.
Before considering buying a foreclosed home, you should make sure you have everything you need in order, such as figuring out your finances and estimating the costs of repairing and renovating the investment property, as well as preparing to compete with all the other investors who will be going after the property.
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