Is Buying Foreclosed Homes a Good Real Estate Investment Opportunity?
When it comes to success in real estate, are foreclosed homes a good and lucrative investment? They can be, but Investing in the foreclosure market is a strategy that requires a level of sophistication and diligence far beyond what most realize. It has big potential, but it takes great effort and experience.
How Do Foreclosures Work?
A foreclosure occurs when a homeowner becomes unable to make monthly mortgage payments to the mortgage lender. The lender, generally, then offers the home for sale at a public foreclosure auction. The highest bidder at the auction buys the property. This includes the title — along with all the liens, unpaid taxes, and encumbrances that go along with it. The foreclosed homes usually are sold at a lower price usually about 20% below market. This fact often is the one of the biggest draws.
a home in foreclosure means more paperwork and going through a longer closing process. These homes can be purchased at auction or via a realtor.
Affordability
The low prices of foreclosure homes make them a solid real estate investment opportunity. Foreclosed homes cost significantly less on average 20% below similar properties that aren’t in foreclosure. A four-bedroom house may be beyond your budget typically, but that same home might be well within your budget if it’s been foreclosed on.
Your monthly mortgage payment isn’t the only thing that goes down when you invest in foreclosures. Finding the cash for down payments is a difficult part of real estate investing, and more affordable home prices mean a lower down payment. You can typically purchase a foreclosed home with a 3.5% down payment.
Location
The location also has a big effect on the value of a house. Homes near the outskirts of a city are typically more affordable, while homes in central locations are valued significantly higher. Some homes are also cheaper due to things like crime rate, quality of schools, property value outlook, and more.
When you buy a bank-owned home, you can invest in homes in neighborhoods you couldn’t afford normally. The homes in better neighborhoods tend to appreciate in value more quickly, in addition to providing a nice, quiet environment for families.
Auctions
After a home has been foreclosed on, it’s often sold at an auction. Auctions can be a good way to find foreclosed homes for sale, but there are a few things you should know if you’re planning on buying a home at auction.
Buying a home at auction means you have to make a cash offer, even if the home has been foreclosed on. While this can be difficult for some buyers, fewer buyers mean you have less competition. Homes at auction are typically sold well below market value.
It’s also important to determine what, if any, auction fees you’ll have to pay upon purchasing a home. Auction fees shouldn’t add too much to the price of a home, but it’s something to consider if you’re on a tight budget.
Steps That Lead to Foreclosure
When a homeowner misses their mortgage payments, there are a few different steps that lead to foreclosure.
Pre-foreclosure: A home is in pre-foreclosure when the homeowner has been notified that they are in default, but the home hasn’t gone to an auction yet. Individuals may list pre-foreclosure homes for sale to try to avoid the actual process.
Short sales: At times, lenders may accept less than the borrower owes on a mortgage if the borrower is experiencing financial hardship. These short-sale homes are sold quickly and below market value.
Foreclosure: If a borrower fails to sell their home in pre-foreclosure or as a short sale, it will be foreclosed on. At this point, the home may go to auction or be sold via MLS listings.
Short sales can be a good middle ground since they’re typically in decent shape and sold below market value.
Downsides of Foreclosed Home
Of course, there is a number of potential downsides to investing in foreclosures. These homes are sold as-is, which means you must pay for and make repairs after closing. In some cases, you may find real estate in distress that’s not worth buying due to the amount of damage it has.
You should also be concerned about the condition a home may be left in, especially if the borrower who defaulted is staying in the house. This is why it’s important to have a good real estate agent and inspector to help you find the right property.
The Verdict
If you want to buy a house below market value, foreclosures can be a smart way to invest. These homes are affordable, which means you can find better homes in better locations. However, the as-is condition of these properties can lead to problems if you’re not careful. So you need to make sure you have a good inspector, a research and exit strategy. With time, effort, and expert help, investing in foreclosed homes can be a great opportunity.
