In the modern housing market, owning investment properties is the ultimate goal. For various reasons, homeowners or real estate investors may fall behind on payments and end up defaulting on their property loan. As tragic as that may be for the owner of the property, real estate investors view foreclosed homes as a great investment opportunity. Buying a foreclosed home requires skills, wits, and construction knowledge.
Foreclosed homes are of great value in today’s real estate market. However, going into the market for a foreclosed property is a process that can go wrong in many ways. Knowing the pros and cons of buying foreclosures can help set beginner real estate investors’ expectations and guide them through the process.
What does it mean to buy a foreclosed home?
A foreclosed property is a property where the owner has defaulted on his/her loan payment. The lender or bank takes the property to resell it to get the initial investment back. A foreclosed property is a property that both the owner and the bank tried to sell but couldn’t.
Related: Major Real Estate Investment Questions: How Can I Buy a Foreclosed Home?
Why do homeowners and real estate investors consider foreclosed homes?
There are mainly two investment strategies that real estate investors consider when buying a foreclosed property:
- Fix-and-flips.
- Buy and hold.
Investing in real estate is about finding the best deals. This method offers real estate investors rental properties for less than the market value.
The pros of buying foreclosed homes
If you keep asking yourself, “Should I buy a foreclosed home?” no one can really answer that question for you as many factors go into processing the decision. Here are a few reasons why you should investigate buying a foreclosed home:
Property’s price
A foreclosed property is known for being a steal of a deal. The bank is a motivated seller as it will be constantly trying to recoup the initial investment out of the property. This means that the bank will want the property’s selling price to cover the costs of the loan and the legal fees which can be less than the property’s current value. Foreclosed homes are known for being affordable and even sometimes cheap.
Clear title
The property investor doesn’t inherit any delayed taxes or mortgage payments from previous owners. The investment property’s title will be clear.
Related: Is Buying Foreclosed Homes a Smart Real Estate Investment?
REOs allow for inspections
In the case of REOs (real estate owned properties), you can have a professional property inspector or a contractor come in to review what repairs are needed to get the investment property in shape.
REOs can be mortgaged for financing
If you’re wondering how to buy a foreclosed home, then you must know that it’s no different than other types of properties. In the case of REOs, the potential buyer can mortgage the investment property for financing. This can make the whole process a lot easier for beginner real estate investors as they might not have the full amount at hand.
No extra time delays on closing the sale
Some real estate investors might be fearful of foreclosure properties because of the known impression of time delays on closing the sale of such properties. This is a common misconception about foreclosed properties. They typically have normal escrow time periods.
Related: Investing in Real Estate: What are Closing Costs?
The cons of buying foreclosed properties
Real estate investors have mastered the art of making money in real estate; they can strategize their selected investment properties and weigh their options. Here are some cons of buying foreclosed homes to watch out for prior to your purchase:
As-is properties
You buy the investment property “as-is” meaning that the bank won’t add any costs on their behalf to fix up any issues or maintenance needed for the foreclosed property. When you buy foreclosed homes, you get the property in the same state it was before the previous owner defaulted. So, you should expect an investment property that is a bit under the weather.
No disclosure
In today’s real estate market, especially in the residential housing market, disclosure is a must. Knowing about all the details when buying an investment property is important to real estate investors. In the case of foreclosed homes, banks don’t have to disclose the history of a property. This can resemble gambling for the buyer. Yes, the property could be one of the best real estate investments in the area, or it could be one of the worst.
The state of foreclosed homes
Buying an investment property, in general, requires some initial maintenance to get the property up and running. However, in the case of foreclosed homes, the real estate investor must be aware that the property may have been on the market for some time. In the meantime, the heating or cooling in the property may have been shut off, and deterioration or depreciation may have taken a toll on the property and its value. This is one of the reasons that foreclosed homes aren’t the best real estate investing method for beginners.
How to buy a foreclosed home
If you have weighed your options and studied them carefully, you can begin searching for the right investment property through a real estate agent specializing in foreclosed homes or using an online real estate investing platform like Mashvisor.
Another very important step when buying foreclosed homes is getting pre-approval on a mortgage. This is important as banks won’t even consider any offers on a foreclosed property without a letter of pre-approval on a mortgage from a lender.
To conclude
Making money in real estate through foreclosed homes is an achievable goal for any real estate investor. Real estate investors must keep in mind to weigh the pros and cons of buying a foreclosure prior to even getting close to bidding or even making an offer on one. It is a process that takes time and has a learning curve just as any venture in real estate. Beginner real estate investors are often advised against buying such properties to avoid gambling with their first few real estate investments.
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