Buying Investment PropertyThe Pros and Cons of Buying a Foreclosure by Sylvia Shalhout January 3, 2018November 18, 2019 by Sylvia Shalhout January 3, 2018November 18, 2019Buying 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 ForeclosureChoice of When to BuyBefore 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.Related: How to Buy Foreclosed Homes from Banks and Why They Are So GreatLower than Market ValueBuying 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.AppreciationBuying 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.Better FinancingWhen 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 PropertiesWhen 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.Foreclosure ExpertsLuckily, 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.Looking for a real estate agent? Mashvisor can help connect you to a great real estate agent who can assist you with finding an investment property. Click here to find a real estate agent near you!Cons of Buying a ForeclosureNeglected Investment PropertiesWhile 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.Related: Why You Should Get a Home Inspection Before Investing in PropertyMake 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 LiabilitiesIf 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.CompetitionMost 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 FriendlyThere 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.Related: Real Estate Investing for Beginners: The BasicsInvesting 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.To keep learning about real estate investing and buy the best investment properties across the US, sign up for Mashvisor. Start Your Investment Property Search! START FREE TRIAL Start Your Investment Property Search! START FREE TRIAL AgentAppreciationCostsFinancingProperty Prices 0FacebookTwitterGoogle +PinterestLinkedin Sylvia ShalhoutSylvia is the Content Marketing Manager at Mashvisor. As a real estate writer, she has been covering topics for the beginner and advanced real estate investor, helping them make smarter decisions as well as real estate agents looking to take their business to the next level. Previous Post What’s the Value Added of Learning from Real Estate Blogs as a New Investor? Next Post Why an Investment Property Calculator Is Smarter Than an Investor Related Posts 8 Steps You Can’t Skip When Buying a House to Rent Out Is Savannah Real Estate a Smart Investment Choice in 2018? How to Buy Multiple Rental Properties in 2020 How Do You Find the Best Real Estate for Sale as an Investor? Subject to Real Estate: The Ultimate Guide for Investors Cap Rate Formula 101: The Top Cities for the Best Cap Rates 2018 Don’t Buy Investment Properties Before Asking These Questions 5 Simple Ways to Invest in Real Estate Investing in Rental Properties: Is It Worth It? 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