In response to the coronavirus crisis, the US Congress passed the CARES act with relief measures, including deferment on mortgage payments of certain property types to avoid a foreclosure crisis like the one witnessed in 2008. Many banks are suspending foreclosures and evictions for 30, 60 and even 90 days. This is good news for borrowers.
At the same time, when the US economy falls on hard times, it’s likely that we will see a spike in foreclosed homes in the market. This is an unfortunate situation. But at the same time, once foreclosures are put up for sale, they create an opportunity for real estate investors.
Foreclosed homes are one of the best real estate investments. Why? Because you buy foreclosures from banks, which means you can enjoy a more straightforward buying process without the subjective participation of homeowners. Also, foreclosures are sold below market value, often 20% to 50% lower, which you can turn into a great return on investment.
Before we dive deeper into why you should invest in foreclosures, however, here is a little refresher.
What Is a Foreclosure?
Investopedia gives the following definition of foreclosure:
Foreclosure is the legal process by which a lender takes control of a property, evicts the homeowner and sells the home after a homeowner is unable to make full principal and interest payments on his or her mortgage, as stipulated in the mortgage contract.
For you as a real estate investor, foreclosed homes are cheaper properties on the market. You buy foreclosures from banks and they usually want the deal done as fast as possible so they can recover the debt the borrower owes them. This means a clean process for you and taking possession of the property quickly. If you are building a rental property portfolio, we recommend investing in foreclosures because it can be faster and cheaper than buying a regular investment property.
Why Buy Foreclosures?
With the current situation in mind, here are the top reasons to purchase foreclosures this year:
Related: 6 Benefits of Foreclosure Investing
1. The period of suspension of foreclosures banks are offering is not too long.
Since between 25% and 50% of borrowers are expected to default on their mortgage payments, it is very likely that many of them will still not be able to get up to date with payments after the grace period. This means the number of foreclosures in the US housing market will increase.
2. New foreclosures are now suspended, but this does not apply to procedures that are already underway.
There are plenty of bank foreclosures already available for sale. With a temporary freeze in spending across the nation, this is the perfect time for a good real estate investment if you can afford it and are confident in your financial situation. There will be hardly any competition at the foreclosure auction.
3. Given the economic climate, even real estate investors should be cautious with spending.
This year will be a good time to buy foreclosures from banks at a good price, not draining your finances.
4. Foreclosed homes are great for flipping due to their low price.
The purchase and the renovation are likely to cost you as much as or even less than a regular investment property. Expect a better than average return on investment when flipping.
5. Foreclosures are perceived to lower the value of the neighboring properties, too.
So your new neighbors are interested in you getting the foreclosed property back in shape and renting it out. They do not want the value of their homes to go down as well.
6. Multi family foreclosures often qualify for rehabilitation loans.
This is additional financial help for the property investor. Plus multi family foreclosures are bigger and harder to sell so banks offer even better auction prices to sell them fast.
Now that you know some of the reasons why investing in foreclosed homes is a good idea, let’s take a look at how to finance and find one.
Financing a Foreclosure Purchase
There are a few ways to finance a foreclosed property:
- Mortgage. The same as with any other investment property for sale. Only you need homeowner insurance and pre-approval.
- Renovation loan. It covers both the buying price and renovation costs. Check with banks and credit institutions for available options.
- Home equity lines of credit (HELOC). This is a loan from the value of a home you already own.
Related: Buying Bank Owned Foreclosures? 7 Things You Need to Know First
Finding Foreclosures for Sale
Since you buy foreclosures from banks, the website of each one usually lists foreclosures for sale. Real estate agents and online listing sites can also help you in the search. But it is already the 21st century! Going through sites takes too much time and does not give you all the information you need to make a good investment decision.
How to find foreclosures the easy way?
The real estate analytics platform, Mashvisor, can be your secret weapon for successful real estate investing. It pulls data from many real estate sites such as Auction.com, puts it in one place, and analyzes it so you get ready reports and metrics on each listed property’s investment potential.
The Property Marketplace lists foreclosures for sale from all states. You do not have to go through countless institutional and agents’ websites. You can search by budget, area, property type, estimated return on investment (cap rate and cash on cash return), and so on.
The Investment Property Analysis shows you the expected investment value of a certain foreclosed property. It looks at rental comps (similar properties that serve as a point of reference for rental metrics) in the neighborhood and estimates the rental income, occupancy rate, cash flow, cap rate, etc. you can get. You can also see if the foreclosure you are considering is good for Airbnb vs traditional renting.
You can also estimate the potential Airbnb rental income of any foreclosed property in the US with our free Airbnb calculator.
Related: Here’s How to Analyze Foreclosures for Sale for Investment
The new year opens up fresh opportunities for investing in income properties. Foreclosures are a great investment in times when real estate investors have to be careful about cash flow as well.
Sign up for Mashvisor to find profitable foreclosures for sale. Start a 7-day free trial here.