While looking for investment properties to buy, you have probably asked yourself: “Why are foreclosures so cheap? Is it a good idea to buy a house in foreclosure?” There is no simple answer to these questions as some investors will tell you these properties will not bring you any profit while others might claim that foreclosure investing will bring you a high return on investment.
As a beginner real estate investor, you must be asking yourself: “Are foreclosed houses cheaper, really?” and “is buying a foreclosed home bad?” Well, the thing is that foreclosed homes are real estate properties whose owners failed to make the mortgage payments. So, banks take over these properties and try to get their investments back.
Is foreclosure good investment? It could be a good real estate investment strategy, but these properties are not for everyone, and you should be aware of what you are getting into. Knowing there are always benefits and consequences to real estate investing is crucial to avoid the pitfalls and take full advantage of the assets. Continue reading to find out about the pros and cons of foreclosure investing.
Pros of Buying Foreclosed Homes
Foreclosed Homes are Below Market Value
Are foreclosed houses cheaper than the rest? Well, this is actually the first benefit of buying foreclosed homes. As they are sold way cheaper than their original market price, real estate investors can cut down some expenses when buying an investment property! Commonly, when it comes to buying foreclosed properties, property investors get to pay way less for the investment property than what it is worth.
Experienced property investors find that foreclosed properties are a bargain in the real estate investing business, as banks try to sell houses quickly and put them on the market for sale below market value! These properties are also cheaper due to the fact that they are usually in a distressed situation, which also lowers their value.
Property investors securing investment property financing is another advantage of buying foreclosed as income properties. To begin with, real estate investors can borrow less money with a loan to buy a property since foreclosed properties are already less expensive. Hence, down payments and monthly payments will be lower as well! For a beginner property investor with little capital on hand, this is particularly beneficial.
In order to get rid of these investment properties, banks could also be willing to give the property investor better financing deals, especially when a bank is highly interested in selling the property as quickly as possible. Consequently, real estate investors could end up with lower interest rates, closing costs, and mortgage payments!
Potential Appreciation and High ROI
The amount of money property investors get in return for the cash they invest in the property on an annual basis is called return on investment (ROI). The property price is an important factor when calculating the ROI. Commonly, in real estate investing, the lower the property price is, the higher the ROI is. So, as foreclosed homes are properties with a low property price, their potential of generating a high ROI and creating wealth is quite great!
Nevertheless, it is important that property investors consider that foreclosed properties are usually distressed homes and not in great conditions, so they will need some home renovations and improvement before selling to make a good ROI. These improvements will increase the market value of the investment property significantly and lead to high appreciation. This appreciation will be beneficial when selling foreclosed homes at a higher price.
Cons of Buying Foreclosed Homes
Foreclosed Homes Are Often Neglected
Are foreclosed houses cheaper? Yes, they are. Are they usually distressed? Yes, they are, and this is probably the worst thing about buying foreclosed homes. Because of this, the real estate investor will have to do some repairs and improvements to sell a house that needs work. Even when this will increase its market value, it will cost the property investor, especially if the property is in a tragic condition. Therefore, if property investors do not do the right financial planning, foreclosed properties could be a financial disaster!
This is why a home inspection is quite relevant. Before buying a foreclosed property, property investors should check it to estimate repair costs. A home inspection will be helpful to make sure you invest in good foreclosed properties, so you avoid hidden expenses and make money instead.
High Competition for Foreclosed Homes
Despite banks are in a hurry to sell foreclosed homes, they will not accept the first offer they receive. As these homes are below market value, plenty of property investors will compete to buy them, so keep in mind that this high competition will drag out the buying process. If you are determined to buy a property, you will have to offer a higher price that sets you apart from the rest of the property investors.
Not for Beginner Property Investors
As a beginner property investor, you might ask “Should I buy a foreclosed home if I am not experienced?” Despite foreclosed properties are a good option for investors with little capital on hand, buying foreclosed homes is not recommended for beginners. From choosing a property to invest on to dealing with banks, buying foreclosed homes can be quite tricky. Typical rent property or a turnkey are other types of investments that are better for beginner property investors. Also, foreclosed homes represent a higher risk for investing than traditional real estate properties. It would be helpful to hire a real estate agent to help in the process, but it is still better to avoid buying foreclosed homes if you are a beginner.
Tips For Buying Foreclosed Homes
– Hire a Real Estate Agent: The best thing a real estate investor can do is working with a real estate agent with experience in buying foreclosed properties. As professionals, real estate agents know exactly what to look for and where to find it.
– Do the Proper Math: Before buying foreclosed homes, property investors should do a home inspection to calculate repair costs to renovate a house while saving money and time. Everything related to the real estate investment should be considered, including the investment property’s capitalization rate, the cash on cash return, and the financing method for the foreclosed home.
– Perform Real Estate Market Analysis: To determine its potential for making a profit, property investors should compare the investment property to other income properties within the same area. This way, property investors can identify the best foreclosed homes.
– Check the Appreciation Rate: The market value of a property will increase with repairs and improvements. Nevertheless, there are several other factors that contribute to appreciation such as amenities, transportation, supply and demand, and facilities in the area. So, before buying foreclosed homes in a certain area, look out for these factors.
– Avoid Real Estate Auctions: As property investors must act fast at an auction, they do not have the opportunity to perform a home inspection, which might lead to a bad investment decision.
Final Thoughts on Foreclosed Homes
Finally, whether you are selling your home or just looking to buy your next home, there will always be pros and cons to consider when it comes to real estate investing. So, if you still ask yourself: “Is it bad to buy a foreclosed house?” We can tell you that as long as you are aware of the disadvantages and how to avoid some issues, foreclosure investing could be an awesome investment that leads to good profits in real estate.