Pros and Cons of Buying Foreclosed Homes

Foreclosed homes are real estate properties whose owner failed to make the mortgage payments. As a result, the bank took over the property and is trying to sell it to get back the investment it made. Buying foreclosed homes can be a good real estate investment strategy. However, these investment properties are not for everyone.

Foreclosed Homes: Advantages

Below Market Value

Every real estate investor would want to cut down some expenses when buying an investment property. This is possible when buying foreclosed homes because they are cheap! Since banks try to sell foreclosed homes as fast as possible, they put them on the real estate market for sale below market value! Another reason why foreclosed homes are cheaper is that they are usually in a distressed situation, which lowers their market value.

Better Financing

If the real estate investor is buying the investment property with a loan, he/she will get to borrow less money since foreclosed properties are already below market value. Therefore, the property investor pays lower down payments and lower monthly payments! Additionally, when buying foreclosed homes directly from a bank, the bank might give the property investor better financing deals in order to get rid of these investment properties and the real estate investor could end up with lower closing costs.

Related: Investment Property Financing: 4 Efficient Methods

High ROI and Appreciation

In real estate investing, the lower property price means a higher return on investment. Therefore, since foreclosed homes are cheap, they have a potential of generating a high ROI. Moreover, when a property investor makes renovations and improvements to the property, this will significantly increase the market value of the investment property (appreciation). A real estate investor benefits from appreciation when selling the investment property later on for a higher price.

Foreclosed Homes: Disadvantages

Are Often Neglected

The worst thing about buying foreclosed homes is that these are usually distressed investment properties and the real estate investor will have to make some improvements. While this leads to appreciation, it still would cost the property investor and, without proper financial planning, could be a financial disaster!

High Competition

Many property investors would assume that since banks are in a hurry to sell foreclosed properties, then they will quickly accept any offer. However, since these income properties are cheap, so many property investors are competing to get their hands on foreclosed homes. Thus, the bank will receive many offers which will drag out the buying process and your offer could be rejected.

Not for Beginner Investors

Foreclosed homes can be tricky and tend to be riskier than traditional real estate properties. Thus, even though these are a great option for property investors with little capital, they are not recommended to beginner investors.

Related: Real Estate Investing for Beginners – Do’s and Don’ts

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