Investing in foreclosures is an outstanding real estate investment strategy. Foreclosure houses are cheaper than conventional properties and can provide massive ROI. However, there are certain aspects of foreclosures that you must know before making an investment.
In this guide, we will cover every significant element of a foreclosure investment and discuss if it is the right strategy for you. We will also discuss the benefits and drawbacks of foreclosure and share tips on how you can smartly make an investment in foreclosures.
What is a foreclosed home?
A foreclosed home is a property that is no longer possessed by the owner, rather it is owned by the bank or lender of the mortgage. This usually happens when the proprietor fails to pay the loan and the ownership of the home moves from the homeowner to the bank or lender that provided the loan.
A foreclosure also happens when the owner doesn’t keep the property insured or fails to settle the property taxes. As a result, the lender who issued the mortgage repossess the home as collateral and can resell it to get the lent money back.
Now, as the lender wants to get rid of the property as soon as possible, the foreclosed properties are often sold at lower prices than the average market value.
Pros & Cons of a Foreclosure Home
Now that we know what is a foreclosed home, let’s discuss some of the benefits and drawbacks of properties that you should consider before investing in foreclosed homes.
1. Cheap Initial Investment
The first apparent advantage is that you can buy foreclosure property at lesser pieces than other similar properties in the area. Also, it doesn’t necessarily mean that the foreclosure home is cheap, less valuable, or in rough shape. It simply means that the lenders want their money back as fast as possible and they decrease the prices to get more buyers.
Lower prices also mean that if you want to invest in real estate, you can buy multiple foreclosure homes at lower prices and make an extensive investment.
2. ROI Potential
Now, if the prices of the foreclosed homes are low, their potential for a profitable return on investment is evidently high. If the home is in good condition and you have done thorough research, then these homes can act as real estate goldmines for you.
3. Better Financing Options
An additional benefit of investing in foreclosures is that the lender will offer better financing as they already want to get rid of the house. So, you might be provided with lower closing costs or lower interest rates. Thus, you have a chance of having even better ROI and cash flow.
1. Thorough Research
If you want to invest in foreclosures, then you must have to do painstaking investigation and research. Once you buy a property without much research, you can fall into a money pit.
While it is not a particular disadvantage, you have to spend time and effort in doing exhaustive research and analysis than a traditional property. This is because these kinds of properties are fewer than conventional ones.
To avoid it, you must focus on why the home was foreclosed, titles on the property, inspections, evaluations, and estimates of the repairs.
2. Maintenance & repairs
Most of the foreclosed houses have to remain abandoned for a while and demand maintenance.
Also, the band or lender wants to send the property quickly and most of the time, the responsibilities of restoring are left to the buyer.
3. Slow process
One last drawback of foreclosures is that they can take a long time. This is because you are dealing with a bank or other lender instead of an individual seller. Banks have a significant number of transactions to make, and even if they agree on a low price, it might take time to complete the actual transaction.
Foreclosure Investing Strategy
If you are sure about investing in foreclosures, the best way to do so is by creating a strong foreclosure investing strategy. The ultimate goal of the strategy should be finding a property that is not in a bad shape and can provide you with excellent returns.
Here are a few things that you must include in your strategy –
Reason of foreclosure
You must find out that the property was foreclosed in the first place as it can highly influence the overall worth of your investment. Could the former owners not pay the mortgage? Was the environment or market near the property was the reason?
Neighborhood and Location
The location, market, neighborhood, and other conveniences nearby can have a huge influence on the general cost of the property. It determines if people want to move into the property you’re buying and how much they are willing to pay.
So, along with the basic condition of the property, it is necessary that you inspect nearby schools, grocery stores, other amenities in the area.
The final step is evaluating the absolute cost of the property. For this, you should thoroughly research the expenditure on repairs, and evaluate nearby houses to decide on amenities, style, and the extravagance of your renovations.
Once you are done with all this breakdown, you will be sure about how much money you exactly need for the property and how much profit it can provide to you.
Acquiring and Owning the Foreclosed Property
Once you have adequately inspected the property, have made certain that it has potential growth, and have calculated your potential ROI, it is time to acquire the property.
Look through publications, reach out to the owners or auction websites that will sell the property. You can also use your network or purchase the distressed loan at a discount from the lenders and get the property.
Once you have acquired the property, you can utilize it in two different ways:
The first option is getting the property, making the essential repairs and renovations, and selling it for an instant source of income.
2. Buy & hold
If you are looking for a long-term investment, you can keep ownership of the property after making the repairs. You can rent it out and use it for a sturdy income rather than one time sale.