Want the scoop -- the truth -- about buying a foreclosed home? If buying a foreclosure is for an investment, such as a flip, you’ll want to know whether you’re getting a good deal and whether you’ll really make any money. And then, how about renovations -- are you up to doing them? Do you even know what’s involved? If you’re thinking about buying a foreclosed house, you should first know what you can realistically expect.
Is the foreclosure a good deal?
The reason people buy foreclosures is to get a good deal on a house. And the assumption regarding foreclosures is that, because the lender has taken back the home and wants to get rid of it, it will be priced below market value. But when buying real estate, you should never assume anything.
You can determine whether the house is a good deal by performing a comparative market analysis on the property. This is accomplished by searching online for recently sold homes in the immediate area to see what they sold for. Look for homes that have sold within the past six months that are within a mile radius or so of the home you’re considering. Also, look at homes that are similar to the foreclosure you’re thinking of buying regarding square footage and the number of bedrooms and bathrooms it has. If you use a real estate agent, they will perform this service for you.
If you find that similar homes are selling for much higher prices than the foreclosure you’re considering, you should do a deeper dive on the property. If the foreclosure is selling for about the same price or more, you probably need to keep looking unless the foreclosure is in pristine condition, which isn’t typically the case. A homeowner who could no longer afford to make their mortgage payment probably hasn't been maintaining the home as they should. Combine that with the home being vacant for a certain amount of time, and the home is likely to be a distressed property in need of some TLC to get it back in shape. Common problems homes face from neglect are broken or leaking plumbing pipes, moisture intrusion that leads to mold, pest infestation, and lots of junk that needs to be removed. Some homes have been stripped of fixtures that are normally left in homes, such as appliances, light fixtures, window coverings, cabinets and shelves, and landscaping items.
Will you make money?
If you’re buying the foreclosure to live in as your primary residence, the question of whether you’ll make money isn’t too important. Although you never want to overpay for any property, as long as you don’t pay over market value for the home, you should be okay. The risk, though, is that the needed repairs might be so extensive that, once you factor in those costs, you might be putting too much money into the home unless you buy it for significantly less than market value.
If you're a real estate investor and you’re buying a foreclosure as an investment property, however, you need to ensure you’ll make money on the deal. You do this by performing a comparative market analysis (see above paragraph) and by accurately estimating the repair and possible renovation work it will take to bring the house to livable and sellable standards. Plugging in the correct numbers for both steps is critical for determining whether you’ll make money, break even, or lose money on the deal. Note that if you’re unable to sell your foreclosure to a buyer, you might want to hold onto it and rent it out until the housing market is better for your property or until you can renovate it to be sellable.
Repairs and renovations
Knowing which repairs and renovations are necessary and how much they’ll cost is a critical step in the foreclosure game. Ideally, you should know as much as you can about a property before you buy. Most buyers hire a certified home inspector to accomplish this.
With a traditional home sale, if you find problems during the home inspection, you can typically negotiate with the seller to either make the repairs before you buy, to lower the home's price, or to contribute to closing costs so you can make the repairs. But with a foreclosure sale, banks sell the properties "as is," meaning they won’t negotiate the price down no matter what’s wrong with the house. You would, therefore, need to add the repair and renovation costs to the purchase price of the home to get the true total expenditure.
Ideally, even with the foreclosure process, you'll be able to have an inspection done after you make your offer and before you close on the home. After you receive the inspector’s report, you can better make the decision on whether the foreclosure is a good deal or not.
The auction process
If you buy at a foreclosure auction, you’ll typically get a low price for the home, but the risks can be high. For example, you might not know whether there is a lien or liens on the property from the owners not paying their property taxes or any contractors who had worked on the home. And the biggest risk is that some auctions don’t allow inspections. Plus, you will likely be competing with experienced investors at an auction, and you usually need cash to buy the foreclosed property.
You can also buy a foreclosure from the bank. Homes that don’t sell at auction become real-estate owned (REO) properties. You can find an REO property through a bank’s website under foreclosure listings.
Foreclosure notable news
In many parts of the country, the foreclosure market is tight and foreclosures are difficult to find, as inventory is at an all-time low from the Biden Administration’s policy of a foreclosure moratorium, prompted by COVID-19, which applies to federally backed mortgages and is slated to last until the end of June 2021 (unless the moratorium is extended). States, however, can make their own policies, and many still allow foreclosures to happen. You can check here to see whether your state is implementing the foreclosure moratorium. If so, the foreclosure inventory will be low until the foreclosure moratorium is lifted.
The Millionacres bottom line
Buying foreclosures can be a complex process. It might be in your interest to hire a real estate agent who specializes in foreclosures to help you with this type of purchase. You’ll need to pay a commission, but the price could be well worth it if the agent can steer you the right way.