Before you while away too many evenings searching online for viable investment properties in foreclosure, take entire Saturdays to attend auctions at your local courthouse with a hundred other investors, or make the winning bid and pay more than you anticipated…Take a step back and ask yourself, “Should I buy a foreclosed house at all?” Only when you have gained a deeper understanding of the foreclosure market can you determine if this is the right choice for your portfolio.
I sincerely wish someone had taken me aside at my first real estate auction and put the situation in those terms. Buying foreclosed houses seems incredibly attractive to nearly every investor at first—it’s a simple way to acquire inexpensive properties which you hope to rehab and sell. But, like entering into an imbalanced relationship, giving your effort to foreclosed homes can be very risky. With that helpful advice, I might have walked away from a handful of bad investments and a lion’s share of frustration years ago. Let me tell you what I’ve learned.
Risks and Rewards of Buying a Foreclosed House
There are many attractive benefits to landing a really great deal on a foreclosed property. First and foremost, the heavily discounted price acts as a beacon. There’s no interaction with the owners so you can sidestep some of the awkward face-to-face offers and price negotiations. And, if you cast the winning bid at a real estate auction and budgeted correctly for any renovations, you have the opportunity to make reasonable returns. Even more, foreclosed inventory is up in more than half of U.S. markets including Philadelphia and other significant metro areas, according to a recent report by ATTOM Data Solutions, so it seems like there’s plenty to choose from.
This all sounds enticing and many new investors would have a hard time passing up a good deal on a foreclosure house. However, the risks involved should impact your cost-benefit analysis for each foreclosed property you consider. These are the four major risks I encountered when purchasing foreclosed homes:
- Increased Selling Price. Due to incredibly high competition at foreclosure auctions, these properties are often won for a price far above their listing—sometimes even far above their actual market value. Go into the auction knowing what your hard stop is for what you are willing to pay and pull out of bidding before you pay more than you intended to. If you win the property at too high a price, you might not feel like a winner later on.
- High Repair Costs. Foreclosed homes are sold “as is,” which usually means rehab costs will be high—and you’re not likely to see a home inspection prior to purchase so you won’t necessarily know what you are getting into. These homes are more likely to require extensive repairs due to years of missed maintenance, neglect, or even vandalism during the very lengthy foreclosure process. Be prepared to spend a pretty penny on major repairs and aesthetics, possibly replacing structural, heating/cooling, or roofing. When you add up the cost of renovations–in addition to the purchase price—you are likely to find that you didn’t get a bargain after all.
- Additional Unexpected Costs. This was my most surprising revelation when I first started purchasing properties at foreclosure auctions. You walk into the courthouse prepared to pay the purchase price, but you may not realize that liens and other encumbrances exist on your newly purchased property. These overdue bills are not always disclosed by auction. Prior owners missed years of property taxes? You’re now responsible for remitting that amount to the IRS. You can try your best to do your due diligence of uncovering these lurking liens but you’ll be spending quite a lot of time and energy and it may not be worth it in the end.
- Wasted Time and Money. You’ve spent hours combing through auction offerings, bidding on properties, evaluating the home for repairs, and rehabbing. But when all the chips fall, it’s not uncommon for properties purchased in foreclosure to have a far lower after-repair value than is needed to balance your considerable investment. It’s possible for this foreclosed home to not deliver profit, leaving you with less cash in hand to continue buying and selling houses.
Pursuing A More Reliable Alternative
If you’re willing to assume the risk of purchasing a foreclosed home, I encourage you to know exactly what you’re getting into. Perform all due diligence that you can prior to signing that check and ensure you are prepared for any and all potential consequences. This is a high-risk, option that some investors manage with grace. But, if you’re looking for other inexpensive houses that come with fewer investment property risks, I recommend purchasing homes directly from distressed homeowners themselves. Distressed homes often have fewer problems with homeowner neglect and are far more reliable investment properties. They’re simply owned by individuals who experience financial distress and who are eager to sell quickly.
Finding distressed homes for investment is much easier than staking your claim on the courthouse steps—which is exactly why I started an independently owned and operated HomeVestors® franchise. The widely-known and trusted “We Buy Ugly Houses®” marketing campaign helps generate leads from homeowners who are in an “ugly” situation so I can create a real estate investment portfolio that’s more reliable for returns.
If you’re looking for an alternative to buying foreclosed houses, contact HomeVestors to find out one of the best qualified lead-generating marketing campaigns available.
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