You are ready to invest in some property and thinking about foreclosures. You have an idea that you can buy something inexpensive, rehab it, and sell it at a profit. It’s the perfect plan.
Maybe.
Here is what you need to know to successfully invest in a foreclosure property.
What is a Foreclosure Property?
When homeowners can’t make their mortgage payments, the lender has the option to take back the home. In some states, foreclosure is a quick process, taking just a few months. In others, foreclosure can drag on for years, with a lot of time spent in court. Once the lender has the property back, it will take it to an auction so it can recoup its money.
There are advantages and disadvantages to investing in a foreclosure property. Here are some of them.
The Advantages of Investing in a Foreclosure Property
They’re less expensive
No doubt, foreclosure homes can be a great buy. The lender wants to get the property out of its inventory and can only make a profit if it gets sold.Due to the lower price, you might even be able to get into an area you would love to call home but otherwise couldn’t afford.
Less competition from other buyers
Most people want a good deal on a home, but they aren’t always willing to put in the sweat equity that is often necessary when you buy a foreclosure property. They don’t have the skills, time, or money to invest in a foreclosure home, so they choose for a “turnkey” home instead.
Renovation potential
With shows like “Flip Flop” or “Property Wars” on television, Americans have become more interested in home renovations and the possibilities in “flipping” a house. There will be plenty of advice, help, and resources if you need them.
Instant equity
If you can get the house at a fair price and have the discipline to stick to your budget when you renovate it, you can build instant equity. Most of the time, banks won’t make any repairs but, if the bank is anxious to get it out of its inventory, you might be able to talk them into covering some of your costs.
Fewer title issues
A title is a document that states someone has a legal right to own a piece of property, whether that is a home or a vehicle. Before you buy, you have to make sure the title is clear. Sometimes, a deal falls through because the homeowner owes back taxes, or there’s a lien on the home. But when you’re buying a foreclosure property, you won’t need to worry about the title. The bank will have already cleared it.
The Disadvantages of Investing in a Foreclosure Property
You can’t inspect the property
In some areas, a pre-sale home inspection is required; at the very least, it’s a smart move. But if you’re buying a foreclosure property, you’re buying it “as is.” That means you can’t walk through the property to see if there is damage or serious problems that need to be fixed. It’s probably not a good idea to buy it unless you have a significant amount of money put aside for repairs.
Squatters
Even though a home has been legally foreclosed, there might still be someone living there. Houses sometimes sit unoccupied for months or even years. This vacancy could attract squatters. If someone is living in the house illegally, you’ll need to legally evict them. This could take months and thousands of dollars you’d planned to spend on repairs.
Period of redemption
If a home is listed as a foreclosure, it might never go up for sale. That’s because nearly every state has a period of redemption for homeowners. This time period gives them a chance to catch up on any back taxes or take any other steps that will allow them to keep their home. They could be given up to a year to work out their financial difficulty, so you’ll need to decide if it’s worth the wait.
Competition from investors.
Even if you aren’t competing with traditional buyers, other investors may want the same foreclosure property as you. Some of these may have bigger budgets and a team of workers. These professionals buy and flip houses regularly. If they’re able to lay down the cash and ask for few contingencies from the bank, they might snatch up the property you want.
Are You a Risk-taker?
Now that you know some of the advantages and disadvantages of buying a foreclosure property, you’re ready to make your decision. It might be helpful to set up a plus/minus sheet with a list of what you can bring to the table and what you can’t.
Be honest with yourself. If you need to make the repairs yourself due to a shortage of money, will you have the time? If you plan to resell the property right away or rent it, can you pay someone to get it up and running for you?
Buying a foreclosure property can be worth the risk and bring you a myriad of benefits, as long as you go into it with open eyes and a plan.
