Foreclosures… big savings or big headache?
Opportunities for Investors
Have you seen a foreclosed property pop up in your neighborhood? The owners move out and all of a sudden the yard is not being maintained and strange paperwork gets posted in the windows. This is terrible because someone is losing their home. Something happened in their life that has prevented them from making their mortgage payments for a few months and now the bank is taking it back.
This is bad news for the neighborhood because, foreclosures tend to bring down the sales prices of the homes surrounding them, even those residences not in foreclosure.
When an area has several foreclosure homes that sell for less than market value, this decreases the value of the other homes in the area. Sellers listing their homes at $150,000 will struggle to get that listing price if their neighborhood also features 3 similar homes that are in foreclosure and all selling near $130,000, mainly because many buyers would love to pay $20,000 less for a similar home in a desirable neighborhood. Even if it does need some cosmetic or minor repairs.
Bargain hunter buyers will often make offers on these homes first. The neighborhood sellers can either lower their asking prices to compete with the foreclosures, or wait for the foreclosures to clear out of their area in the hopes of getting the sales price they desire.
While foreclosures might make a sellers sale more difficult, they do present great opportunities for buyers. A lower-priced foreclosure could help buyers afford a home in a neighborhood they otherwise may not have been able to purchase in.
But beware! Buying a home in foreclosure can also come with big headaches, mostly because these homes are often in less than perfect condition.
Traps to avoid when looking at foreclosed homes
You’ll find what look like great opportunities by bidding and buying a foreclosed home at an auction. Sometimes the auction process is live and sometimes it may be an online process. You’ll typically not know how many you are bidding against and we always recommend making your best offer when making an offer on these properties as many of these do sell well over the opening bid and advertised price. Just to note, the auction process can also a risky way to buy a home, because you won’t always have the chance to inspect a foreclosed home beforehand and occasionally, YOU will have to evict the homeowner after you take possession of the property!
When buying a foreclosure, you will be typically be buying the home in it’s AS-IS condition. Once you get possession, you might find that it needs costly repairs that can quickly eat up the savings you thought you’d enjoy.
When a bank fully forecloses on a home, it becomes an REO (real estate owned) property. Banks are required to pay off any liens filed against these properties, but they will still be typically sold AS-IS. As a buyer you can hire home inspectors to take a close look at the home before you buy to give you an idea of how many hidden issues you may be faced with. This will give you an idea if this home is a bargain or a potential money pit.
A foreclosed home can present a great investment opportunity under the right circumstances. We advise you do your homework, and you could possibly come away with a diamond in the rough.