Should You Invest in Foreclosed Properties?
I often get asked questions and as many people often have the same question these questions convert to an interesting blog post. So let’s address this question, should I invest in foreclosed properties?
There is incredible potential with foreclosed property investing. Whether you should or not depends on how involved and detailed you want to be in the process.
Investing in foreclosed properties is indeed for the active investor. It will require a great deal of diligence. The reward can be very beneficial when all the stars align correctly.
RELATED POST: What Is Foreclosed Property Investing?
Things to consider when investing in foreclosed property
Acquisition and repair costs:
This one, of course, is a given but often the repair cost is underestimated which may result in problems. I have found that a great rule of thumb is to estimate high on all repairs and then add 10% to 15% contingency funds.
It is very rare to come in on budget when doing renovations because there are simply too many unknowns until you dig into the project.
Holding costs:
While the property is being repaired and or renovated you are not living in it therefore it is not providing housing for you. If you purchased for the purpose of investing you are not renting it and drawing income either. The expenses still accrue.
When doing calculations make sure you add in cost of mortgage payments, insurance tax, HOA fees, lawn maintenance, etc. Plus if your intent is to flip for a profit, you want to consider marketing time and additional hold time until the property closes.
Right of redemption period:
This is a huge consideration as it may have serious financial consequences. As an investor is imperative to understand the laws of foreclosure and the redemption periods. These redemption laws may vary from state to state and city to city.
Depending on your local and state laws, the past homeowner may have a period of time where they can bring the full amount of money that they have been in arrears and take back the control and ownership of the property. This does not happen a lot but it does happen.
These redemption periods vary from location to location so make sure you check your local redemption laws and timeframes and avoid the areas with long redemption periods. When you do buy foreclosed property it is important to avoid spending too much (if any) on capital improvements until the redemption period is over.
Nothing will motivate a past owner to find a rich uncle to borrow the redemption funds than a house that is now fully improved and you do not want to carry that financial burden.
Careful research and diligence:
Like anything worthwhile there are great properties selling at great prices and there are many that do not. You do not want to assume that if you buy a foreclosed property that you are automatically buying a great deal. You want to spend time understanding the foreclosure process both from the legal aspect as well as the lending institution you are working with.
You want to be able to access a good deal from one that simply has no meat left on the bones. You want to buy in a location that will be a good resale even if you plan to hold it. The basics of real estate always apply.
The quickest way to learn how to do foreclosures is through mistakes you can make. This is often the most expensive way as well, (not recommended). Taking time to learn the nuances up front of laws and due diligence in advance should be your top priority. Often the banks who own these properties move rather quickly once they finally put the property on the market for sale, so you will want to be prepared to move swiftly.
When it comes to banks and foreclosed properties deadlines are a top priority. Often they have per-diem attached to deadline dates so advanced diligence is always pertinent.