A foreclosure happens when a lender takes over a property from its owner to recover any money that is owed. For the longest time, buying foreclosed homes to rent out has been one of the most popular investment strategies to make money in real estate. But why? What motivates property investors to buy foreclosure homes as investment properties? We can sum up the answer in a single word – savings.
When you buy a foreclosed home for sale, there’s a good chance that you’ll pay less than the market value and save a significant amount of. According to USNews, the average discount for a foreclosed home (when compared to non-distressed/non-foreclosed properties) is around 15%. In some states, the saving potential is even greater! When you combine this with the fact that home prices are soaring in many cities across the US housing market, you can see why buying foreclosed homes is the preferred strategy for real estate investors looking for affordable options.
Related: Is Buying Foreclosed Homes a Smart Real Estate Investment?
However, this is not the kind of process you want to rush into. Buying foreclosures is a bit different than buying regular rental properties. Therefore, before you try investing in foreclosed homes, there are a few things you need to learn. Keep reading this blog post as we guide you through each step of buying a foreclosure.
Step 1: Research the Real Estate Market
Foreclosures are not necessarily beat-up houses in run-down neighborhoods. The old “location, location, location” rule applies when investing in foreclosures. In addition, regardless of whether you’re thinking of buying foreclosed homes to rent out or to fix-and-flip, someone is going to be living in the property. So, if you want to invest in a foreclosed house as a rental property, then you need to make sure it’s in a good neighborhood where tenants will want to live.
When choosing the best neighborhood to buy rental properties, there are a number of things real estate investors should look at. First of all, consider the overall market conditions, safety, and make sure crime rates are not too high in the neighborhood. If you’re hoping to rent out to families, then you need to have a look at the school district rating, walkability score, and availability of public transportation.
In addition, take note of vacancy rates in the neighborhood. You don’t want to own a rental property in a location where multiple properties are vacant since this brings home values down. Essentially, you want to be buying foreclosed homes in a real estate market with strong rental demand. This will allow you to earn a decent rental income from the property and, hopefully, generate positive cash flow.
Step 2: Find an Agent Specializing in Foreclosures
If you’re a first-time buyer of real estate investment properties or a first-time foreclosure buyer, you should definitely enlist the help of an experienced real estate agent. Banks usually hire real estate brokers to handle their REO (real estate owned) properties and sell them. This means that as the buyer, you’ll be working directly with the bank’s broker. Therefore, working with a real estate agent who has experience in buying foreclosed homes is the best thing a real estate investor can do.
Look for agents who have helped clients make offers on foreclosed houses in the past. They’ll know the laws surrounding foreclosures and how the process works. Not only that, but real estate agents give you an advantage in that they can let you know as soon as foreclosed properties hit the market and where to find them.
Step 3: Get Financing for Buying Foreclosed Homes
The absolute best way to buy foreclosed investment properties is to pay all cash – this way, a real estate investor can enjoy a quick sale. Moreover, cash deals are not subject to lender requirements (which are strict when it comes to buying foreclosed homes).
However, if you don’t have the cash for buying the property, then you need to find the financing. There are typically 3 financing options available for buying foreclosed homes. The right one for you depends on what you’re planning to do with the property.
- Permanent Mortgage Loans: While these work for buy and hold investors who want permanent financing and lower interest rates, keep in mind that FHA and VA loans are for owner-occupied properties only.
- Hard Money Loans: These are specifically designed for real estate investors who renovate (fix-and-flip) foreclosures and want short-term financing to compete with cash buyers.
- FHLMC HomeSteps Loans: This is a loan program by Freddie Mac. These loans are suitable for both real estate investment properties and primary residences.
As you can see, the third financing option is best for a real estate investor thinking of buying a foreclosure and turning it into a rental property to generate rental income. With this property financing method, you can buy a foreclosed single-family home with a down payment of 15% – 25%. Moreover, these loans don’t require appraisals or mortgage insurance and loan terms run for up to 30 years.
The downside is that interest rates for these loans are slightly higher than conventional mortgages. In addition, this loan program is available in only 10 states: Alabama, Florida, Georgia, Illinois, Kentucky, North Carolina, South Carolina, Tennessee, Texas, and Virginia.
If you’re looking for more options to finance buying foreclosed homes, read: How to Buy a Foreclosure with No Money Down – Quick Guide.
Step 4: Find Foreclosed Properties for Sale
There’s a number of ways that real estate investors can find foreclosed homes for sale. Banks and mortgage lenders typically make their foreclosure REO listings public. Online sources and newspapers are also good ways to find a foreclosure. Check out the video below to learn the 9 different ways to find foreclosures:
We recommend looking online yourself and working with a real estate agent at the same time.
Where can investors find foreclosure investment property for sale online? One way is to use Mashvisor’s search tools! Simply enter the city where you’re looking to invest and click “Start Analyzing”. Then, set the “Foreclosure” filter so the only real estate listings you’ll see are the available foreclosures for sale in the city.
The best thing about using Mashvisor to find foreclosures is that it doesn’t just offer foreclosure listings. It also offers a way to analyze rental properties and determine your return on investment! With our Investment Property Calculator, you can apply even more filters to customize your property search and analysis including:
- Property financing (cash or mortgage)
- Down payment and interest rate
- Investment property type (single-family, multifamily, condo, townhouse)
- Desired rental income
- Desired cap rate and cash on cash return
And there’s more! All of these filters will help you find foreclosed property for sale that meets your criteria. Not only that, but you’ll also ensure buying foreclosed homes that have good potential for making money in real estate as rental properties. To learn more on how to use Mashvisor’s investment tools, read: How to Find Foreclosed Homes for Sale to Invest In and Make Money.
To start your search for a foreclosed home for sale that will make a profitable investment property in your city and neighborhood of choice, click here!
Step 5: Review Real Estate Comps in the Area
After finding a few foreclosed houses for sale that meet your investment criteria, the next step is to evaluate the asking or listing price. How do real estate investors do that? What you need to do is find and review real estate comparables (or comps for short) in the neighborhood. This is the same step you’ll need to take when buying regular (non-foreclosure) real estate rental properties.
In this step, you need to look at recent home sales in the area to see what similar properties have sold for. After that, compare those trends to the foreclosed home you’re considering to determine its current market value. As mentioned, foreclosures are typically priced below the market value. Remember the average 15% discount we mentioned earlier? If the foreclosure’s price is above the comparable sales, you might want to think twice before making an offer.
In addition, reviewing real estate comps allows investors to compare the property to others to determine its potential for making a profit. By looking at what similar rental properties in the area are making, you’ll have an idea of what rental income you can expect to earn from buying foreclosed homes there. As a result, comps are important to find profitable properties, understand the market, and make a competitive offer based on that.
Note: When using Mashvisor to find and analyze foreclosure investment properties, you’ll also have a list of real estate comps for any listing you find on the platform. So, you can check and see if the foreclosure is actually below market value and make sure you get the best deal without doing any work yourself!
Start out your 14-day free trial with Mashvisor now to get started.
Step 6: Make Your Offer on the Foreclosure
This is the final and most important step in the process of buying foreclosed homes to rent out. There are a few things to keep in mind here. First, most banks provide detailed instructions for buyers on how to submit an offer. Therefore, if you want to buy a bank-owned property for real estate investing, you need to accurately follow the submission guidelines.
In addition, if you’re financing the purchase with a loan, make sure to include a copy of the pre-approval letter with your offer. If you don’t, you’re basically leaving it up to the bank to determine your qualifications. What’s worse, the bank could simply toss your offer aside in favor of one that does have a pre-approval letter attached. It only makes sense to show the bank that you’re financially capable of buying the foreclosure property. Moreover, a pre-approval letter can also help you compete with all cash offers.
Lastly, a real estate investor should prepare for a bidding situation. Some banks will accept offers for a certain time period and choose the highest bidder. However, sometimes a bank will contact all potential buyers to let them know a higher offer has been made. In other words, the bank will try to get buyers to outbid one another and, thus, drive up the price. This is why it’s important to know the value of the property and how much you’re willing to pay for it!
After you make an offer and if everything moves forward as planned, it usually takes 30-60 days to close on a foreclosed house – which is basically the same as buying a non-foreclosure.
The Bottom Line
These are the 6 steps for buying foreclosed homes as investment properties. It’s important to remember that foreclosure laws vary from one state to the next. So, you should seek the advice of a real estate agent who is familiar with your local laws before buying a foreclosed property.
Do you believe you’re ready to start searching for foreclosure investment properties for sale? Make sure to check out Mashvisor to analyze and compare properties in your city of choice to find a profitable one in a matter of minutes! To learn more about how we will help you make faster and smarter real estate investment decisions, click here.