In the aftermath of the subprime mortgage crisis, many real estate investors have begun to ask one of the most common real estate questions: “Should I buy a foreclosed home?”. The answer… is a mixed bag. You’re bound to find a real estate investor claiming that foreclosed homes bring extremely high ROI, while another real estate investor will be saying it can make you penniless. Of course, these are two extremes, and most cases fall in the middle. So, should you buy foreclosed real estate properties? Here are related pros and cons, and tips for each con to help you decide if this investment strategy is right for you!
Should I Buy a Foreclosed Home? – Pro #1: Buy at a Lower Market Value
The most obvious benefit of foreclosed properties is that they are cheaper investment properties. More often than not, these cheaper investment properties sell for lower than their actual market value. With a good tidying up, these cheaper investment properties can become cash cows helping you by making money.
Related: How to Buy Foreclosed Homes from Banks and Why They Are So Great
Should I Buy a Foreclosed Home? – Con #1: … Which Generates Competition
Foreclosed properties are cheap investment properties, but that’s no secret. Since these real estate properties are typically inexpensive and below market value, many real estate investors are flocking towards them. Many offers from investors competing for buying investment properties tend to extend the buying process from a bank’s perspective.
Tip: Find a location that is not oversaturated with real estate investors looking for foreclosed homes. A real estate agent could help you with this.
Should I Buy a Foreclosed Home? – Pro #2: Potential for Appreciation and High ROI
With the majority of foreclosed real estate properties being below fair market value, their values can only go up! A real estate investor can significantly increase appreciation of a property with many renovations once a property is purchased. Then, the investor can decide on making money in two ways. The investor could opt for making money by renting out the property, steadily increasing appreciation. Or, the real estate investor could make a big splash by selling the property after the large increase in value, leading to a huge ROI.
Should I Buy a Foreclosed Home? – Con #2: … But Also Potential for Excessive Spending
Buying investment properties that are foreclosed can make for very profitable investments. They can, however, be the complete opposite if an investor is not careful. Foreclosed real estate properties can be a drain on your wealth if their maintenance and renovation costs are exceedingly high. This is often the result of a bad foundation in some of the property’s structure or functioning, like a bad sewage system, for example.
Tip: Have the foreclosed property inspected before purchase. This will reveal if it has any functionality issues. Get the help of a real estate agent who specializes in foreclosures. The agent will help you with every aspect of how to buy foreclosed homes.
Should I Buy a Foreclosed Home? – Pro #3: More Likely to Secure Financing
A lot of banks typically want to get rid of their foreclosed homes. As a result, they offer great financing deals in order to rid their hands of these real estate properties.
Should I Buy a Foreclosed Home? – Con #3: … Except with FHA and VA Loans
The only problem with this is that federal home-owning mortgage programs, such as those from the FHA and VA, are often not eligible for buying foreclosed investment properties.
Tip: Have good financing credentials a lender would expect (ex: good credit). If possible, try to pay only in cash. This helps secure the deal.
Should I Buy a Foreclosed Home? – Pro #4: Plenty of Properties
As the US began to recover from the ’08-09 mortgage crisis, more foreclosed real estate properties became readily available. In almost any location, a real estate investor could find many foreclosed properties. Such high supply eventually makes many investors ask one of the most topical real estate questions and wonder how to buy a foreclosure.
Should I Buy a Foreclosed Home? – Con #4: … But They Are on the Decline
While there are many foreclosed properties that exist, that number has been dropping significantly over the years. There was a 3% decrease in the number of available foreclosed homes from 2014 to 2016. Going back six years from 2016, there has been a mighty 62% decline in the number of foreclosed real estate properties.
Tip: Search for a location with low rates of decline in available foreclosed properties. Still, when buying investment properties, regardless of investment strategy, always go for the best deal.
Should I Buy a Foreclosed Home? – Pro #5: Could Be a Great Investment
Buying investment properties that have been foreclosed can be a very lucrative investment strategy for real estate investors. These properties could be more likely to repay themselves off, providing that a reasonable amount is used for upkeep and renovations.
Should I Buy a Foreclosed Home? – Con #5: … But Better for Experienced Investors
While foreclosed properties are indeed cheaper investment properties with the potential to repay quickly, they are inherently riskier than traditional real estate properties. This risk can be mitigated with a professional real estate agent. Still, it is best for beginning real estate investors to avoid foreclosed homes for sale.
Related: Real Estate Investing for Beginners: Avoid These Mistakes When Buying a Foreclosure
Tip: Hire a real estate agent to help with everything related to how to buy foreclosed homes. Gain some experience through another investment strategy if you are a novice real estate investor.
Related: Learn How to Buy a Foreclosure Home by Following These Steps
Summary
Wanting to know how to buy a foreclosure is to be expected with their recent popularity. These cheaper investment properties can be very profitable, in terms of appreciation and ROI. These properties require upkeep and renovations, though, to bring the property to a standard. Since these properties are riskier, as mistakes can lead to overspending, they are best left for the experienced. It’s best to go after these properties with the help a real estate agent who specializes in foreclosures.
For more on “Should I buy a foreclosed home?” and other real estate questions, be sure to visit Mashvisor, your ultimate source for real estate investing!