Buying a foreclosed home could be an easy way to score a great deal on a property with a decent foundation. But it could also be a money pit that causes you to lose your entire investment and then some. Before you take the plunge and start shopping for a foreclosed home in your area, there are some important things to keep in mind – and some important strategies to utilize.
The Allure of Foreclosed Homes
It’s not hard to see why foreclosed homes have such an appeal to real estate investors. Banks typically foreclose on homes when their owners miss several payments or are otherwise unable to pay back the loan; they want to make at least some of their money back and are usually interested in getting rid of the property as soon as possible. This means you may be able to purchase a home for an extremely low price, whether you buy it outright or partake in a bidding war to claim ownership of the property.
From there, you have a number of options. You could renovate the home if it’s in need of attention and flip the property to make a quick profit, or you could rent the home to your new tenants and collect rent money on a monthly basis. You could even live in the home yourself and wait for it to appreciate before selling it again. But for any of these scenarios to work, you need to make sure you’re getting a good deal.
What You Should Keep in Mind
Before you even look for a foreclosed home, you should keep the following in mind:
1. Not all foreclosed homes are a good deal.Just because foreclosed homes are cheap doesn’t mean they’re a good deal. There’s a reason why they are so inexpensive. You might be able to find a property for $20,000, but it might be in such bad shape that it needs to be completely demolished. Too many amateur investors get in over their head and are stuck with a foreclosed home that needs hundreds of thousands of dollars of work.
2. You should prepare for the worst-case scenario. If you want to plan this smartly, you’ll need to be prepared for the worst-case scenario. Estimate your expenses as conservatively as possible and be ready to confront some issues that aren’t superficially visible. You’ll likely need to rent a dumpster to get rid of the extra clutter and make renovation cleanup easier.
3. You can learn about the home’s history. Take the time to learn about the house’s history before buying it. Who owned it previously? Why was this property foreclosed on? You can learn a lot this way.
4. A home inspection is a good investment. Home inspections generally cost a few hundred dollars, but they can tell you a great deal about the condition of the home. Work with an inspector you trust and make a list of all the issues they find.
5. Plumbing and electrical problems can ruin your profitability. There are many potential issues with foreclosed properties, but plumbing and electrical problems are some of the worst, at least financially. If you need to re-pipe or rewire the entire house, you’ll have a hard time making a profit.
6. Liens can be devastating. Liens (legal claims against a property) can be a major complication for a foreclosed home. Lenders, unpaid contractors, and other interested parties may impose liens on foreclosed homes and these liens aren’t always easy to see or find – but they can compromise the value of your purchase and cause you significant financial and legal headaches down the road. Make sure you are documenting everything related to the house in the eNote or paper note during the deal process. So that later if at all any legal headaches caused by involved parties can be handled easily.
7. All locks will need to be rekeyed. Past homeowners and past tenants may have lingering bad feelings about this house or may have kept their keys for personal gain. Accordingly, if you’re buying a foreclosed house, you’ll need to have all the locks rekeyed before it can be considered safe.
8. Other real estate investors and experts will be interested. Keep in mind that tons of other real estate investors and experts are going to be interested in foreclosed properties, and they’re going to be searching for the best possible deals. That means you’re going to face a lot of competition, making it harder to get a good price. It also means that a property with no interested bidders may have some dealbreakers attached to it.
None of this is to say that buying a foreclosed home is a bad idea or that all foreclosed homes are problematic. In fact, many real estate investors have turned impressive profits because of their skill in finding and renovating foreclosed homes. Just be cautious and do your due diligence before making any significant financial moves.