You know how to buy a foreclosure, right? Buy a really cheap property, fix it up, sell it, and make a killer profit on it, right?
Slow down! As you might have imagined when clicking on this blog, there’s a lot more to buying foreclosures than those three ambiguous steps. Here’s how to buy a foreclosure as an investment property with some pointers you may not have considered.
Before learning how to buy a foreclosure, let’s know the basics first. A foreclosure property is when a borrower (homeowner) is unable to make loan payments and the lender (bank) then has to make up for the loss by reselling the property to another buyer or repossessing the property. The borrower is given a grace period, called pre-foreclosure, to make payments or try to sell the property during this time. That’s when investors look for pre-foreclosure properties or Notices of Default (NOD).
If these attempts are unsuccessful, then an auction is held at the end of the pre-foreclosure period in which a third party buyer can purchase the property or the bank can repossess it at the auction. These sales are known as Notice of Trustee Sale (NTS) or Notice of Foreclosure Sale (NFS). Typically, if the owner can’t redeem the loans, then an auction will be held outside the courthouse. If no one meets the minimum bid, then the bank repossesses the house and hires an agent to list it and sell it, and it becomes a Real Estate Owned property (REO).
When looking for foreclosure properties, know if the property is still owned by the borrower or by the lender, and if a NOD has been issued. If the property is still borrower-owned, the investor should contact the owner. If the property is bank-owned, then you’ll know if you should be aware of auction requirements or if you should deal directly with the listing agent.
Buying The Property
1. Looking for properties
Look for foreclosure and REO properties online and keep the following in mind when looking:
- If there are a lot of foreclosure properties, that’s not necessarily a positive thing. If one neighborhood has a lot of foreclosures, be cautious. That means people in the area are unable to make their payments. Does that mean there are no job opportunities in the area? Finding an area with a lot of foreclosure properties is countereffective – you’ll have no problem buying them but you won’t be able to sell them.
- Stay open to overpriced foreclosure properties. They might sit longer on the market but that means banks could jump on your offer.
- Use your contacts to find opportunities. You might be acquainted with lenders or homeowners who can recommend potential properties.
If a property looks good online and meets your criteria, go check it out in person and get an inspection.
2. Getting in touch with brokers
You also want to get in touch with a broker who works directly with banks and foreclosure homes. You’ll find an agent by looking through these listing and calling them. Show them you mean business by immediately going to a lender after talking to them. Also ask them about future listings that will be coming up.
Most banks have one listing agent for a foreclosure property- try to work directly with these people.
3. Getting approved for a loan
A preapproval letter will indicate how much can be borrowed based on credit score and income. Getting a preapproval letter should actually be the first thing you do because once a deal is found, there may not be enough time to go back and sort things out with the bank. Good deals go quickly so having an approval letter ready will prevent you from missing out.
Cash payments are even better for foreclosures, if feasible. Besides the fact that many auctions won’t accept anything besides cash-offers, banks do not like to acquire foreclosure properties and are more likely to quickly accept cash paymenys.
4. Paying for the property
Although foreclosure homes are typically below market price, look at comps to see what similar properties are going for. Don’t forget to calculate repair and renovation costs. Remember you’re buying a property as-is.However, this doesn’t mean you should expect the bank to take renovation costs into consideration when selling the house.
If homes are selling quickly in that area, the best strategy is to bid your highest offer initially.
This all doesn’t mean you shouldn’t look for or won’t find great deals. You should try to find homes that are below market value to renovate them to bring them back up and beyond market value. Just know, buying really cheap properties might get you into an overwhelming amount of work that requires experience.
Creating An Investment Property
1. Making renovations
Renovations should be made quickly and efficiently. The the longer they take, the pricier they get. Make sure to know typical renovations that come with a foreclosure. Have an inspector and contractor look at the property before buying it to see if there are major deal-breakers.
Get to know subcontractors and tradespeople ahead of time. Use tools like Houzz to find landscapers and other professionals and design ideas.
It’s important that the home sticks out from all other homes. It should be cleaned, renovated, and updated. However, make sure that you stay within a reasonable budget. You wouldn’t want to overspend on renovations and updates and not make enough on rental income to get a good ROI. If you’re going the rental property route, it is best to use a rental property or Airbnb calculator to make sure the numbers add up.
Related: 5 Tricks To Save On Fix-and-Flips
2. Marketing the property
Before getting too excited about selling the property, keep in mind buyers won’t exactly be ready to pay premium price for a house that has just been foreclosed, even if the property looks similar to comps. Investors shouldn’t worry if their renovations have allowed the property’s value to be above average, but they should be patient in allowing people to get comfortable with the property.
Knowing how to buy a foreclosure requires patience and more importantly, contacts – the more people you know, the more likely you’re able to find struggling homeowners, foreclosures to be listed, and people that have experience with such investments who could help.