Looking for a new opportunity that few investors are going after? Well, what about foreclosed properties? Is it a good idea to buy a house in foreclosure, or is this some hyped up strategy that only a few real estate investors have found success with?
The first thing you need to know about buying foreclosures is that it isn’t the easiest process. While it may not seem like the easiest way to make a profitable real estate investment, when done right, this could be an investment with some serious return. We’ve got some great tips for buying a foreclosed home in the US real estate market for you today! Continue reading and find out how you can make the most of this investment strategy.
Tip #1: Know the Difference Between Foreclosures and Pre-Foreclosures
Real estate investors pursuing this investment strategy need to first understand the difference between these two terms in order to determine what they’re really after.
Buying a foreclosed house and buying a pre-foreclosed property are two different processes. Pre-foreclosures are the properties which are still at the beginning of the foreclosing process due to the owner missing mortgage payments or tax obligations. Typically, it’s easier for investors to go the route of buying pre-foreclosures as they’d be dealing directly with the homeowner and not the bank. You can get a more discounted price from a distressed seller, and because it is still a pre-foreclosure, you can get a good deal ahead of time before it’s listed on the market.
Now once the property is officially repossessed by the lender, which is typically a bank, it usually either hits the free market or can be found in a public auction. Here, banks are trying to get these foreclosed houses off their books and will still be willing to give you a discounted price, but there’s more competition and it could be a lengthier process.
Related: Short Sale vs Foreclosure: What’s the Difference?
With this information, decide beforehand which stage of the foreclosure process you want to jump into when buying this kind of investment property.
Tip #2: Understand the Market Values
The best tip for buying a foreclosed home is to just know the real estate market you’re investing in. How many foreclosed houses for sale are found in this market? Is this property being repossessed as a result of owner-specific circumstances, or is there a negative housing market trend? Investors need to research their markets well before buying an investment property.
You also need to know the actual value of the foreclosed property before making any offers. Things like proximity to schools, local laws, and crime rates can affect property value and you need to take a look at all of these indicators. This is where you also need to take into consideration the long-term value. Any foreclosed home has two values and they both play a big part in determining the profitability of this kind of real estate investment. To turn over a profit, you need to compare the foreclosure’s current selling price with its final value after you’ve taken this property on. Some help from a real estate inspector and an appraiser will let you know if there’s a good deal to be made by investing in a foreclosed property.
If you’d like to get some data for a real estate market analysis, our tip for buying a foreclosed home is to use Mashvisor’s database. You can gain access to accurate and reliable estimations of final market values for investment properties based on real estate comps in your area.
Related: Real Estate Market Analysis vs. Home Appraisal: What’s the Difference?
Tip #3: Choose the Right Investment Strategy
Before you even start searching for foreclosures near you, you need to define your strategy. What are your goals for this foreclosure investment property? When it comes to the holding period and your real estate investment goals, there are two main strategies you can choose from:
Fix and Flip Strategy
Often times, foreclosed properties are ones in distressed conditions which require some renovation and fixing up. This is a short-term investment strategy and the holding period will not be long. However, the return you make depends on the extent of renovation required for this property and how quickly you can sell it. You also want to make the best renovations for this investment property so that you really do get your money’s worth. Create value for this property through the redevelopment it needs.
Rental Strategy
You should check out the rental market and make sure there is demand for a new rental there if this is the strategy you’re going for. Here we’re talking about the opportunity for long-term cash flow. A tip for buying a foreclosed home and renting it out afterward is to check the local rental rates. If they’re not as high as you’d like, check out higher value rental comps; see what updates you can add to justify a higher rate. Either way, if you’re in the market to invest and become a landlord, buying a property at a discounted price can be quite profitable.
Sometimes you won’t really have a choice but to choose this strategy if the property was already holding tenants. In this case, these tenants might come with the foreclosure. This is something you need to study and look into. They already have signed leases, so try to find out what type of tenants you’d be dealing with.
In short, this tip for buying a foreclosed home for investment is to choose the right strategy for the property and the market.
Tip #4: Don’t Ignore the Mortgage
Real estate investors should be diligent when it comes to making their investment property mortgage payments. But to make sure they’ll make these payments, they need to get a mortgage with a good interest rate. Some first-time investors look for loans with a lower monthly payment, but these typically come with higher mortgage rates. A tip for buying a foreclosed home and having more equity is to consider your options and maybe take on the higher payments if they come with a lower overall interest.
Tip #5: Have an Exit Strategy
This isn’t just a tip for investing in foreclosures, this is a tip for investing in any type of real estate. You need to have an exit strategy to know how to get out of this investment in case the market experiences a downturn. In the case of investing in foreclosures, investors really do need to look at housing market trends and consider all associated expenses with an investment like this. You shouldn’t go into this expecting a quick turnaround and sale; you need to put in the time and effort it requires.
Also, when searching for properties, learn from the mistakes of the previous homeowners. If there are a lot of foreclosures in that area, there may be a more large-scale issue to be looked at. Something like a high unemployment rate could be leading people to default on their payments. Whatever it is, you don’t want something like this to hit your investment plan by surprise. Know what to expect and plan accordingly. After all, the goal is to come out of this real estate investment making money, not losing it. All of these tips for buying a foreclosed home should definitely help put you in the right direction with your investment.
If you want to make the most out of your investment, we recommend you use Mashvisor. You can search for foreclosed properties for sale by visiting the Mashvisor Property Marketplace. You can then proceed to conduct a full investment analysis with our tools.
Click here to check out the Property Marketplace.
Related: Here’s How to Analyze Foreclosures for Sale for Investment