Real estate investors often wonder if they should consider foreclosed homes as their next investment property. With so many real estate investment options, you might be thinking, why even bother to learn how to buy foreclosed homes from banks?
The truth is, there are many advantages to investing in this kind of real estate. With the right knowledge, real estate investors can know how to buy foreclosed homes from banks and enjoy the benefits while diversifying their real estate investment portfolio.
What Is a Foreclosed Home?
A foreclosed home is a property that has been seized by a lender (typically a bank) because the owner couldn’t make payments on a loan. Foreclosure is a process, and there are actually three steps during this process in which a real estate investor can buy the investment property: pre-foreclosure, an auction, and post-foreclosure. While we will discuss all three steps, the recommended time to buy foreclosed homes is post-foreclosure. Before choosing when to buy the foreclosure, there is an important step that you absolutely cannot skip over: studying the housing market.
How to Buy Foreclosed Homes from Banks: Know the Housing Market
If you want to make money in real estate, you have to be able to recognize the best investment opportunities. You also have to be able to identify the worst investment properties. This is no different when thinking about how to buy foreclosed homes from banks.
A study of the housing market where the foreclosed home is located will help you determine if it is a good real estate investment. Figure out the market value from a proper real estate market analysis and compare it to the foreclosed property price to determine what kind of return on investment you will get. Resources like Mashvisor can help you get an inside look into the housing market you’re interested in. Real estate comps from Mashvisor will help you figure out if the foreclosed property will be a positive cash flow real estate property or not.
How to Buy Foreclosed Homes from Banks: Pre-Foreclosure
During this step of foreclosure, the investment property is still owned by the borrower. However, the bank has sent notices to the owner, letting him/her know the foreclosure process has begun and the investment property will be seized. At this time, a real estate investor can contact the owner of the home. Real estate investors can identify these homes as they will be listed as “Notice of Default.”
While we are talking about how to buy foreclosed homes from banks, in this step real estate investors are actually buying the investment property from the original homeowner. This has its advantages. For one, real estate investors are likely to be dealing with a very willing property seller. Homeowners with property in pre-foreclosure are facing eviction and would most likely welcome the opportunity to make money.
The downside? Real estate investors will probably need to have cash on hand to pay for the investment property in this step. Unless financing is already in place for buying an investment property, it might be difficult to make a deal with the homeowner.
The investment property may have other issues besides late mortgage payments. Sometimes, contractors have a stake in the property if they haven’t been paid. If a divorce is involved, an ex-spouse may also have ownership. Real estate investors may have trouble getting all of this info, which is why it is advised to buy post-foreclosed homes directly from a bank.
How to Buy Foreclosed Homes from Banks: The Auction
Once the investment property has been seized from the owner, it is put up for auction. This auction for the investment property is sometimes done right on the courthouse steps, once the legal process is over.
Real estate investors sometimes think they can go into these kinds of auctions and offer up really low prices. The fact is that the bidding for the investment property starts at what is owed in mortgage payments. As with the pre-foreclosure, a real estate investor would need cash to pay at this stage of the foreclosure.
When thinking about how to buy foreclosed homes from banks, real estate investors should approach these auctions with caution. The reason for this is that auction mentality can sometimes take over. The investment property price can keep going higher as bidders raise it in competition. Real estate investors who approach auctions in this competitive, emotional way end up overpaying for the investment property. This means losing money on the investment in the long run.
Related: 10 Ways to Avoid Losing Money from an Income Property
If there are no bidders, the bank becomes the official owner of the investment property.
How to Buy Foreclosed Homes from Banks: Post-Foreclosure
In this step of the process, the foreclosed home is now referred to as real estate owned (REO) property. Because the bank now owns the house, real estate investors can be confident in the fact that the investment property has been cleared of any legal issues that may have been present in other stages of the foreclosure. The bank will have to evict the tenants and then list the investment property for sale with a real estate agent.
At this point, real estate investors make offers for the investment property. The bank accepts, denies, or counters the offers. Many real estate investors turn to real estate agents for help with this part. An experienced real estate agent can help you put up the right offer. If the offer is accepted, real estate investors will have time to get the proper financing as well as inspect the property thoroughly to confirm that it is a good real estate investment. Make sure that the deal allows you to back out of your offer if any red flags show up during inspection or an official appraisal.
Related: 5 Real Estate Negotiation Tips for Investors
How to Buy Foreclosed Homes from Banks: Where to Find Them
Foreclosed homes are not as hard to find as you might think. Real estate investors can seek out real estate agents who specialize in foreclosed homes. If you prefer to look for one on your own, you can usually turn to the typical places where investment properties are listed. These include newspapers, MLS, HUD Homestore, and Mashvisor. You could go directly to foreclosure sites or even the REO departments at banks.
Related: What Makes for a Good Real Estate Agent?
Why is Investing in Foreclosed Homes So Great?
Investing in real estate will always have its risks and its benefits, and foreclosed home are no different. As long as real estate investors follow this guide on how to buy foreclosed homes from banks, they should find that they can enjoy the following benefits:
- Because banks ask for what is owed in mortgage (and any incurring fees) as the price for foreclosed homes, real estate investors can end up paying less than the market value. This results in a higher return on investment.
- If the foreclosed home has been on the market for a long time, real estate investors can get it for even lower. This is because banks will want to get rid of the foreclosure at that point.
- Foreclosed homes are not always in the worst locations or in the worst condition as some real estate investors might assume. In fact, some require only a few repairs and are found in great neighborhoods. This means there is room for appreciation of the investment property.
- Financing is generally not an issue for foreclosures, whatever the investment strategy will be. As long as the investment property is in a decent condition, the real estate investor will have no issues with large down payments or high interest rates.
Learning how to buy foreclosed homes from banks should be on the to-do list of every real estate investor. Foreclosed homes have real potential for making money in real estate investing, whether you choose to flip them or rent them out. Do your homework on the foreclosure as you would with any investment property, and you won’t regret it!
