A lot of investors are lured into the world of property by the prospect of getting a great deal on a foreclosure. On paper, foreclosure properties are a really good option for investors. The banks sell them at a fraction of the value of the property, looking to recoup some of the debt that the former occupants left behind. Unfortunately, buying a foreclosure property isn’t the same as buying a new property or one from a financially stable owner-occupier that is looking to move. The human element involved with foreclosures can make them stressful and expensive.
There are a few potential issues with buying a foreclosure, including:
The State of the Property After Foreclosure
Foreclosure properties were lived in by someone who could not afford the mortgage payments. This means that the person probably had serious financial issues. They likely couldn’t afford to take care of the property, so it could have dampness issues, damaged fixtures and fittings, or other problems. Even if the property is in relatively good condition, when someone is getting evicted, they may want to “fight back” against the bank, and they’ll do that through damaging the property or ripping out everything that isn’t nailed down—and some things that are as well!
It’s not uncommon for people who get evicted to come back and vandalize the property afterwards. Now, that isn’t guaranteed to happen—some people will accept the repossession and move on. Some people will fight back, though. You need to be aware of this risk, and have a plan in place to deal with it if you’re going to deal with foreclosure properties.
Challenges With Lenders and Foreclosure Properties
Buying a home from a lender (as you would in the case of a foreclosure) is not the same as buying from an individual. There are several extra layers of bureaucracy, and you will find less transparency too.
It’s harder to get financing on a home that a lender thinks is uninhabitable. If you’re getting the property for such a low price that you can pay cash, then that isn’t an issue; however, you will need to think carefully about how hard it will be to renovate the property before you sell it. In addition, you will have to accept that there will be no seller disclosures regarding issues with the property. You can’t just ask the current occupants, so you’ll have to have a thorough home inspection done and there’s always the risk of the inspector missing something.
Foreclosures can be good deals, it’s true—but that means there is a lot of competition for them, and you’ll be competing against other investors willing to make all-cash offers. If you’re in the position to make an all-cash offer yourself, you can compete, but you will need to move quickly, and the faster you move, the less time you have to reflect.
Foreclosures are not a good first-time investment option, but for experienced investors they can offer incredible returns. The trick is making sure that you assess the property fairly. Look at the area, the amenities, the size, and the condition of the property, and base your assessment on those things. A low price isn’t always a bargain.