As the title suggests, we are going to guide you on how to buy foreclosed homes. So, stick around to find out how the experts do it!
Sometimes, the investment strategy has nothing to do with an investment gone bad. In fact, most of the time it is the wrong process of buying an investment property. Same goes for buying a foreclosed home as an investment.
Before we get to the “how to” part, let’s take a look at the pros and cons of buying a foreclosed home. This way you get to decide for yourself whether you want to invest in this type of property in the first place:
Pros of buying a foreclosed home:
As for the advantages of buying foreclosures, there are plenty. Here are the top 3 reasons why we think real estate investors should invest in a foreclosed property:
- Price: Property sellers (in this case the lenders) want to get rid of that property. Therefore, they offer it at a 10-15% discount on the original property price. This means more profit margin for you considering what you were able to save on the purchase.
- Build equity: Equity is very important in real estate investing. Therefore, by saving 10-15% on a purchase in addition to the down payment and any further fixes you apply, guess what? You managed to build more equity in a short period of time.
- Fit for almost every investment strategy: Whether it is rental properties, buy and hold properties, or fix-and-flip properties, it doesn’t matter. In fact, a foreclosure is one of the best real estate investments regardless of the strategy due to the higher profit margin it provides. So, we really think that every real estate investor should go for it.
Related: What Is Equity in Real Estate?
Cons of buying a foreclosed home:
Honestly, I personally think it is not about how to buy foreclosed homes. Rather it is all about how you work out the cons to your advantage. Here are the two major concerns regarding foreclosed homes:
- As is: The worst part about buying a foreclosed home is that there is no guarantee of the property’s condition. A property seller won’t be responsible for fixing what’s wrong with the property. This makes it your responsibility to hire a contractor and an appraiser to find out the needed repairs and how much they’ll cost. Another downside is the unexpected costs that are more likely to appear in a foreclosure than any other type of property.
- Long vacancy period: Considering the condition of a foreclosed home, it will need some repairs. This might lead to longer vacancy periods until you get everything done. So, it really depends on how fast can you get the house in shape and start renting it out.
Now, let us dig into how to buy foreclosed homes the right way:
1. How to buy foreclosed homes: Mortgage pre-qualification
Finances are the first thing you must figure out in any type of investment. For foreclosure, it is the same even though it requires less money to acquire, thus, making a mortgage the most convenient financing choice for you.
However, to qualify for a mortgage, you will have to have a good credit score. That is probably the thing that most property buyers struggle with. But, we have two solutions for bad credit:
1) You turn to a credit repair service.
2) You find a partner with good credit score. You could even do it in the form of “renting their credit” in exchange for money. In the end, it is up to you to figure this out. Bottom line, there is a way out of bad credit, so don’t get discouraged.
2. How to buy foreclosed homes: Property inspection
As we said before, a property seller isn’t responsible for whatever is wrong with the property. They are selling it as is, so for you as a property buyer, it is a “take it or leave it” deal. But, before you decide whether to take it or leave it, go ahead and inspect it on your own. Hire a contractor and let them inspect the house for any damages and estimate the repair costs. Remember, every penny you put into this deal is a part of your expenses. Even though you get the property at a discount, you still do not want to exceed a certain limit of property costs. Otherwise, it’s not a very good deal.
Another professional you want to work with is a property appraiser. Get an estimation of the value of that property in that specific real estate market considering its condition. What an appraiser will do is look at real estate comps and compare this property to them (a comparative market analysis). Meaning, that he/she will compare the investment property to other similar ones around it and estimate its original value and the foreclosure value.
Finally, you will need to hire a title company to check for liens against the property. Make sure there are none that you will be left with.
3. How to buy foreclosed homes: Hire an agent
How to buy foreclosed homes is never a concern if you choose to hire a real estate agent. If you don’t feel confident going through the process alone, then go ahead and find a good real estate agent. Preferably a local one who actually knows every corner of the location. Since they are experts on how to buy foreclosed homes, they will be able to get you the deal you want with the least amount of effort on your part. The only aspect that you must take into account would be the agent’s commission. Other than that, it is a great idea to hire one.
4. How to buy foreclosed homes: Go through the numbers
Numbers are the direct answer to how to make money in real estate through foreclosures. Using Mashvisor’s investment calculator to figure out all the return on investment measures would be a great idea. You can calculate the cap rate as well as the cash on cash return. These will help you estimate the amount of income a property is expected to generate. That is, especially, if you are investing in a rental property.
If you wish to learn more about buying a foreclosed home, check out Mashvisor’s blog.