As you’re searching for investment properties to buy, you must have asked yourself: is buying foreclosed homes a smart investment? There is really no straightforward answer to this – while some property investors claim that foreclosed homes will bring you a high return on investment, others will tell you these investment properties will not bring you any profit.
If you’re a beginner real estate investor, you might be wondering what foreclosed homes are exactly? Foreclosed homes are real estate properties whose owners failed to make the mortgage payments. So, the bank took over the property and tries to sell it to get back the investment it made.
Buying foreclosed homes can be a good real estate investment strategy. However, these investment properties are not for everyone. This is why you, as a real estate investor, should know what you’re getting into. There are always benefits and consequences to every aspect of real estate investing. Being aware of these is essential for property investors to take full advantage of the benefits and avoid the pitfalls. In this article, we dive into the pros and cons of buying foreclosed homes as income properties to help you determine if they make a smart investment for you!
Advantages of Buying Foreclosed Homes
Foreclosed Homes are Below Market Value
This is the first and most obvious benefit of buying foreclosed homes. Every real estate investor would want to cut down some expenses when buying an investment property. This is possible when buying foreclosed properties because they are being sold for a much cheaper price than their original market price! More often than not, the property investor buying foreclosed properties gets to pay much less for the investment property than what it’s worth.
Banks try to sell foreclosed homes as fast as possible. Thus, they put them on the real estate market for sale below market value! Another reason why foreclosed homes are cheap investment properties is that they are usually in a distressed situation, which lowers their market value in the real estate market. Savvy property investors find that foreclosed homes are a bargain in the real estate investing business.
Another advantage of buying foreclosed homes as income properties is that property investors are more likely to secure investment property financing. First of all, if the real estate investor is buying the investment property with a loan, he/she will get to borrow less money since foreclosed properties are already below market value. Therefore, the property investor gets to benefit from paying lower down payments and lower monthly payments! This is especially beneficial for a beginner property investor with little capital on hand.
In addition to that, when buying foreclosed homes directly from a bank, the bank might be willing to give the property investor better financing deals in order to get rid of these investment properties. This happens when the bank finds it in its best interest to sell the investment property as quickly as possible. Therefore, when buying foreclosed homes, the real estate investor could end up with lower closing costs, interest rates, and mortgage payments!
Potential Appreciation and High ROI
The return on investment (ROI) is simply the amount of money property investors get in return for the cash they invest in the property on an annual basis. One factor that plays a major role when calculating the return on investment is the property price. Generally, in real estate investing, the lower the property price means the higher return on investment the property investor receives. Therefore, since foreclosed homes are cheap income properties with low property price, they have a high potential for generating a high return on investment and creating wealth!
However, property investors need to keep in mind that foreclosed properties are usually in a distressed situation and not in great conditions. Therefore, the property investor might conduct some renovations and improvement in order to make a good return on investment. These improvements will significantly increase the market value of the investment property and lead to high appreciation. A real estate investor benefits from appreciation when selling foreclosed homes later on for a higher price.
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Disadvantages of Buying Foreclosed Homes
Foreclosed Homes are Often Neglected
In real estate investing, property investors buy foreclosed homes “as is.” This is the worst thing about buying foreclosed homes because these are usually distressed investment properties. As a result, the real estate investor will have to do some improvements and repairs. While this will increase the investment property’s market value, it still would cost the property investor especially if the investment property is in a miserable condition. Thus, foreclosed properties could be a financial disaster for property investors if they don’t do the proper financial planning!
This is when the importance of a home inspection comes in. The property investor should check foreclosed homes before making the purchase in order to estimate the repair costs. A home inspection will assure you invest in good foreclosed properties with the potential to make money and help you avoid hidden expenses.
High Competition for Foreclosed Homes
Many property investors would assume that since banks are in a hurry to sell foreclosed properties, then they’ll quickly accept any offer that comes their way. However, this is not exactly true. Because foreclosed homes are below market value, a lot of property investors compete to buy these income properties, so your offer could be rejected. In addition, this high competition means the bank will receive so many offers which will drag out the buying process. If a real estate investor is determined to buy the investment property, he/she will have to offer a higher price that sets him/her apart from the competition.
Not for Beginner Property Investors
While foreclosed properties are a good option for beginner property investors with little capital on hand, buying these investment properties is actually not recommended for them. Buying foreclosed homes can be tricky from choosing the investment property to dealing with banks. There are other types of investments that are better suited for a beginner property investor such as turnkey or a typical rental property. Furthermore, these income properties tend to be riskier than traditional real estate properties. Hiring a real estate agent to help in the process is wise, but still, it’s best for beginner property investors to avoid buying foreclosed homes
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How to Find a Foreclosed Home
If you feel that the pros far outweigh the cons for you and you’re ready to jump into foreclosure investing, check out the video below to learn about 9 different ways for finding foreclosures.
Tips For Buying Foreclosed Homes
- Hire a Real Estate Agent: In real estate investing, working with a real estate agent with experience in buying foreclosed homes is the best thing a real estate investor can do. Agents are professionals who know exactly what to look for in profitable investment properties and where to find them.
- Do The Proper Math: Property investors must do a home inspection and estimate the repair costs before buying foreclosed homes. This saves them time and money. Take into account everything related to the real estate investment including the financing method, the investment property’s capitalization rate and the cash on cash return.
- Perform Real Estate Market Analysis: This allows property investors to compare the investment property to other income properties within the same area to determine its potential for making a profit. In turn, this allows the property investor to identify the best foreclosed homes.
- Check The Appreciation Rate: Doing repairs and improvements will increase the market value of the investment property. However, there are so many other factors that contribute to the appreciation rate such as the supply and demand, amenities, transportation, and facilities in the area. Thus, keep an eye out for these factors before buying foreclosed homes in a certain area.
- Avoid Real Estate Auctions: Even though a real estate investor is guaranteed to find foreclosed homes at a low price in an auction, these are the worst when it comes to a home inspection. Property investors have to act fast at an auction, thus they don’t get the chance to perform a home inspection, which further means they might end up making a bad investment decision.
Final Thoughts on Foreclosed Homes
To conclude, real estate investing – no matter the type of investment property you buy – will always have pros and cons for property investors to consider. As long as you’re aware of their pitfalls and how to avoid falling into them, foreclosed homes could be a great investment that leads to making money in real estate. To learn more about how we will help you make faster and smarter real estate investment decisions, click here.
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