Buying a foreclosure can be a great real estate investment strategy if you know what you’re getting into.
Investing in real estate requires delving into the type of investment and knowing exactly what you stand to gain and what problems you may face. Knowing the benefits ensures you’ll take full advantage of them along the way and not miss out. Of course, knowing the pitfalls helps you avoid them and plan accordingly in case they are unavoidable. Just like any other type of investment, buying a foreclosure has its share of pros and cons that you need to be aware of.
Pros of Buying a Foreclosure
Choice of When to Buy
Before buying a foreclosure, real estate investors have to decide at what stage of the foreclosure process they want to make the purchase. There are three stages, and the real estate investor has the benefit of choosing when to buy, depending on his/her investment strategies and goals. Looking for a short sale? Pre-foreclosure is the time for you. Prefer auctions? Wait until the foreclosure goes up for auction. Rather deal with the bank directly? Then move forward when the foreclosure becomes real estate owned property. Choose what works for you, but keep in mind that each stage has its advantages and disadvantages.
Lower than Market Value
Buying a foreclosure can mean paying less than the market value of the investment property. Usually, the foreclosure is priced equal to what is owed in mortgage payments. Because you’re not buying a foreclosure from a real estate investor looking to get a high return on investment, you can get away with paying much less than what the foreclosure is worth.
Buying a foreclosure at lower than market value is one way of making a quick return on investment, but don’t forget about fixer uppers. Look for a foreclosure that is somewhat of a fixer upper, meaning it needs a few repairs. You can end up increasing the market value of the investment property even more. This is a great real estate investment strategy for achieving a high return on investment, specifically when the foreclosure is in a great location.
When buying a foreclosure directly from a bank, the bank may be more willing to give a real estate investor better financing. This happens when the bank finds it in its best interest to sell the investment property as quickly as possible. A real estate investor could end up with lower closing costs, interest rates, and mortgage payments for this reason.
Variety of Investment Properties
When a lot of real estate investors think of buying a foreclosure, they think of dilapidated homes in the worst neighborhoods. So, they avoid buying a foreclosure because they imagine it to be the worst investment property out there. The truth is, while some of those foreclosures might exist, many of them are great investment properties in the best real estate markets. Most importantly, buying a foreclosure is not limiting in the kind of investment properties available: from single family homes to luxury homes. This means real estate investors have an easy way to diversify their real estate investment portfolio while investing in real estate at a lower than market value.
Luckily, a real estate investor doesn’t have to do all the work when buying a foreclosure if he/she chooses not to. There are real estate agents who specialize in buying foreclosed homes who can help you every step of the way. These real estate agents can find the best foreclosures for you and make sure you get a high return on investment.
Cons of Buying a Foreclosure
Neglected Investment Properties
While it is possible to find a good fixer upper for a high return on investment, beware of foreclosures that are completely distressed. Buying a foreclosure at certain stages of the process means you could be buying an investment property as is, meaning the bank isn’t responsible for making any repairs. At certain stages, real estate investors don’t have the opportunity to inspect the property either. Investment properties like these end up requiring a hefty sum that could be more than the market value. Ultimately, the real estate investor will lose money. Real estate investors should also be concerned about these types of properties because they will face limited financing options.
Make sure you’re getting your hands on a good fixer upper that you can work with and not a rundown foreclosed home with no opportunity for making money.
Hidden Costs and Liabilities
If a real estate investor chooses to buy a foreclosure at any other stage before it becomes a real estate owned property, the accumulated costs and any liabilities will be inherited. Anything from unpaid property taxes to home equity lines of credit can become a responsibility of the real estate investor.
Most real estate investors assume that the bank is dying to get rid of the foreclosure because it is vacant and fees are piling up. This is true in some cases. However, other times so many real estate investors are competing for buying a foreclosure, that your offer could be rejected. Alternatively, the process of buying a foreclosure could be dragged out because of all of the offers the bank receives.
Not Beginner Friendly
There are different kinds of investment properties that are great for beginners, like a turnkey property or a typical rental property. Buying a foreclosure, however, isn’t recommended for beginner real estate investors. It can be a bit tricky from choosing one from real estate listings to dealing with the bank. Just remember, you can turn to a real estate agent if you are a beginner real estate investor interested in buying a foreclosure.
Investing in real estate, no matter the type of investment property, will always have pros and cons for a real estate investor to consider. Despite the cons, buying a foreclosure can be a great real estate investment opportunity that can lead to a quick return on investment or even passive income. As long as you understand the risks as well as how to take advantage of everything they have to offer, foreclosed homes can turn into the best real estate investment.
Ready to start looking for a foreclosed home for sale? We’ve put together a list of the 9 different ways you can find one. Check it out in the video below.
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