You say freak, I say unique!
That’s the funny thing about foreclosed homes; so many real estate investors try to avoid them and don’t see them as an opportunity to be seized. They get goosebumps just seeing the sign “foreclosure.” I’m not going to lie, it is sad passing by foreclosed homes mainly because we are unaware of the reason behind their foreclosure. There are many reasons why someone would go into foreclosure: lost a job, can’t work because of medical conditions, divorce, excessive debt or maybe even a job transfer to another state. Despite the reason of undergoing foreclosure, these types of investments are worth taking a closer look at as they can be a smart real estate investment strategy.
What are foreclosed homes?
As I mentioned before, foreclosure happens for various reasons. The most common one is when the owner of the home fails to pay the mortgage. The lender (usually a bank) has all the legal rights to evict the tenants and take the property and put it up for sale.
The property is usually placed on sale for a much lower price than its market value. You see, this is why foreclosed homes are like Oreos, the good stuff is all on the inside. Ignore the outside image and put your emotions on the side. Foreclosed homes are a great opportunity for home investors to purchase a cheap property rather than a more expensive investment property. It’s true that every type of investment has its ups and downs, but if an investor can manage to get through them, he/she will be able to generate a positive cash flow from a really low priced property. Let’s take a look at the advantages and disadvantages of foreclosed homes and you yourself can decide if it’s worth taking the risk or not.
Advantages of foreclosed homes:
1. Below market value
This is probably the most appealing reason as to why investors should invest in foreclosed homes. Every real estate investor aims to find a good deal for a cheap price and cut down on expenses. This is possible with foreclosed homes since they are usually in distressed situations and sold below market value. Smart property investors find that foreclosed homes are a bargain in the real estate investing business and use them to their advantage.
2. Better financing
Foreclosed homes are more likely to secure investment property financing which makes buying foreclosed homes and income properties very beneficial. If the real estate investor is planning on buying the investment property with a loan, he/she will get to borrow less money due to the fact that foreclosed homes are already below market value. So the investor benefits from paying lower down payments and lower monthly payments as well. This is great news especially for beginner real estate investors with little money on hand.
Also, when you buy foreclosed homes directly from the bank, the bank might be willing to give investors better financing deals in order to get rid of these properties because they are usually interested in selling the property as quickly as possible. Therefore, you could end up with lower interest rates, mortgage rates, and closing costs when you buy foreclosed homes.
3. High ROI and appreciation
Every real estate investor aims to invest in a property with a high ROI. Return on investment (ROI) is the amount of money you get in return for the cash you invest in the property. In real estate, the lower the property price, the higher return on investment you receive. Foreclosed homes offer high ROI due to their cheap price and are a great way to create wealth for investors. The one thing you need to keep in mind is that foreclosed homes are usually not in good condition. This might require the property investor to conduct some renovations in order to make a good return on investment. The improvements you make to the property will increase its market value and lead to high appreciation. You will benefit from appreciation when selling foreclosed homes later on for a higher price.
Disadvantages of foreclosed homes:
1. Require improvements
With foreclosed homes comes the unpredictable costs and damages. When these properties are placed on the market for sale, the banks are not responsible for the current condition the property is in and will not make any improvements or repairs before the property is sold. So before you buy a foreclosed house, you need to have a home inspector point out the problem with the house and have a contractor to provide repair estimates for you.
Related: How to Fix and Flip Foreclosed Homes
2. Increased demand
Another disadvantage that comes with foreclosed homes is high competition. It’s true that there are numerous investors who would avoid these types of investments, but there are those who chase these opportunities. There is an increased buyer competition when dealing with excellent foreclosed homes. When investors and homebuyers find these attractive deals, several offers begin to come, turning the deal into a bidding war. Increased buyer competition and interest are inevitable when dealing with excellent foreclosed properties.
3. Slow process
Buying foreclosed homes is not an easy process. It requires a lot of paperwork and additional documents that you need to complete to prepare for the closing. It is a time-consuming process and any response from the bank could be slow and may seem like a decade for the buyer.
Now let’s explore how to buy foreclosed homes the right way:
1. Mortgage pre-qualification
The most important part of buying investment properties is the financing. Even though foreclosed homes require less money to acquire, still a financing plan is required. A mortgage is the most convenient choice for these types of properties. The downside to getting a mortgage is needing a good credit score which most investors struggle with. There are two options to getting a mortgage with a bad credit score: either turn to a credit repair service or find a partner with a good credit score.
2. Finding foreclosed homes
There are a few different ways to find foreclosed homes and for the best results, you may want to explore a few different ways. Check out the video below to learn about the 9 best ways to find foreclosures:
3. Property inspection
As I previously mentioned, a property seller is not responsible for whatever the condition the property may be in. You either accept it as it is or leave it. But before you decide to take on the foreclosed property, you should have an inspection done to determine how much it will cost you to fix all the damages. You don’t want the property’s repair cost to be more than what you purchased the property for. That would certainly be a waste of time and money.
4. Hire an agent
The process of buying foreclosed homes can be overwhelming for many investors. You should hire a real estate agent to help you out if you don’t feel confident enough to do it on your own. You should hire a local agent, one that knows every corner of the location.
5. Go through the numbers
Going through the numbers is an important step to make money in real estate. It helps you determine the return on investment and the estimated amount of income a property is expected to generate. To help you go through your numbers efficiently, use Mashvisor’s investment property calculator. With our tool, you can calculate the cap rate and cash on cash return.
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The bottom line
Foreclosed homes can appear as lucrative investments with profitable opportunities. On the other hand, they can appear as undesirable investments with unpredictable damage costs. No matter how you perceive them, foreclosed homes can have their benefits.