Is investing in foreclosures a good idea?
There’s many ways to invest in Real Estate. When it comes to purchasing property, one of the key factors that comes to mind first is – where can I find a bargain? For bargain hunters, investing in foreclosures seems to be a great idea and rightfully so; Someone didn’t pay their mortgage, it’s owned by the bank or someone who doesn’t want it…it should help me find a bargain.
Like most things, there could be obstacles along the way. Let’s talk about the possible pros and cons of investing in foreclosures. Before we dive into those, however, let’s discuss some “rules” for success.
Do Your Homework
I know, I know just like school, ick. But there is much to say about being prepared/having knowledge and all of that. To invest in foreclosures successfully, you need to know the approximate value of the property (as it stands and once updated), have risk mitigation strategies, know/be able to estimate the repair costs and select properties in areas that will improve.
Know the approximate value of the property
Look at the area, and the comparable properties and what they have sold for in the last few months. If you don’t know how to get this information, a Realtor can help you. Just don’t abuse them – if you are going to ask a Realtor to help you, you should be willing to utilize them with the sale/purchase of the property also so they get paid. Realtors only make money IF a property closes. In some areas, buyers are not expected to pay the Realtor’s commission (only sellers pay). In other areas, the commission is split (sometimes evenly) between the buyer and the seller.
Have Risk Mitigation Strategies
If you are planning on flipping the property but it doesn’t sell quickly are you planning on renting it? If so, long-term or short-term? Have you been a landlord before? Do you know anything about property management? Laws differ from state to state about leases and security deposits, eviction notices, etc. Again do your homework.
Estimate Repair Costs
Repairs can really break the bank if they aren’t simple fixes. Also if tearing down walls is required or ripping up floors, you just never know what you will find. Be able to estimate the repair costs (ask contractors if they can give you an idea) and add 20% for surprises.
Location, location, location
Chose real estate in areas that are destined to improve.
Pros to Investing in Foreclosures
Disclosure: Some of the links in this article and throughout this website may be affiliate links, which can provide compensation to me at no cost to you if you decide to purchase.
All information found on lauralanham.com is intended for informational and educational purposes only.
Foreclosures can be very lucrative and Foreclosure.com is an excellent tool and offers a free trial!
Another pro is foreclosures can be a great way to negotiate a bargain and the seller (e.g., the bank) wants to sell the property as soon as possible. Also since you are dealing directly with the lender, you may be able to negotiate closing costs.
When buying foreclosed property, the title is probably clear. Unlike purchasing from an individual, where the title could have liens or back taxes owed, when a foreclosed property is purchased, all issues with the title are normally taken care of prior to the sale.
Cons to Investing in Foreclosures
A lot of foreclosures are in bad shape. Many repairs may be needed – those that are visible and those that aren’t. Some home owners actually damage the property themselves once they know they have to leave.
Even though the bank wants to sell the property asap, the buying process may be lengthy. You may need help from an experienced Realtor®.
You may not deal with as much competition from buyers who want to purchase a property to live in, however, there could be competition from professional flippers. In this market, multiple offers are common so you will need to be prepared to offer above listing price in a multiple offer scenario.
To Wrap Up
Investing in foreclosures can be a very lucrative endeavor, however, you must do your research and be prepared. Don’t overpay for property (even though you may “love” it), make sure you allow enough money in the budget for surprise repairs, and learn about property management in case you need to rent the property.
Foreclosure.com is a great place to start and offers a free trial.
Don’t forget about the pros and cons and seek out the advice of a Realtor® if you need help.