As an investor, you’re always on the lookout for properties that will return substantial profits. With an uncertain housing market, as well as high inflation and interest rates, foreclosed properties may be on the verge of flooding the market.
A property becomes foreclosed when a homeowner fails to make mortgage payments and defaults on their home loan. The property is eventually seized by the lender and then sold.
If you’re considering investing in foreclosed properties, know that foreclosures offer significant advantages and drawbacks. Learn the pros and cons of investing in foreclosures and decide whether you should pursue foreclosed properties in 2023.
Pro: Lower Purchase Price
The first benefit of investing in a foreclosed property is the likelihood of paying a below-market price to purchase the home.
Remember that at a foreclosed property, the seller is the original lender. The lender’s investment — fronting the homeowner money for a mortgage — has already gone sour. After being burned once, sellers of foreclosed properties are usually motivated to move fast and get the property sold.
Given the seller’s urgency, the price of a foreclosed property is usually lower than comparable, non-foreclosed homes nearby. Deciding whether you’re being offered a fair rate on a foreclosed home may be difficult and can be aided by working with a standout real estate agent.
Pro: Better Financing, Lower Closing Costs
When lenders seize a foreclosed property, they want to sell it fast. This gives investors like you bargaining power that can result in better home financing rates and reduced closing costs.
Down payments and monthly mortgage payments on foreclosed properties are bound to be lower than those on non-foreclosed homes. But foreclosed properties can command even more advantageous investor financing options, as lenders often agree to lower rates to get the home sold quickly.
In addition, foreclosed properties often come with lower closing costs. Lenders want to get rid of the property and sometimes waive closing costs and other buyer fees.
Pro: Ability to Renovate
For investors who want to control renovation on their properties, foreclosed homes offer attractive possibilities.
Foreclosed homes sell “as is,” meaning that the sellers don’t typically do renovations or work on the home before selling. This makes foreclosed homes cheaper and makes it easier to implement your own design and renovation ideas. After all, it’s not practical to tear apart a freshly renovated home, but a foreclosed property comes with the expectation of renovation. For many investors, buying a foreclosed property is attractive because it puts you fully in control of all renovation and refurbishment that takes place at the home.
Pro: Potential for High Return on Investment
The benefits of foreclosed properties all work together to increase the buyer’s odds of a sky-high return on investment.
After all, foreclosed properties:
- Sell at a lower price
- Have more advantageous home financing
- Can often be bought with reduced or no closing costs
- Become more valuable after you or another investor renovates and rehabilitates the home
By the time you sell a property you bought when it was foreclosed, you may end up with a significant profit. A property that was foreclosed and inexpensive can be remodeled and remarketed as the most expensive house on the block. With legwork and good timing, you may find that foreclosed properties are the most lucrative investments in your local market.
Con: Repair Work May Be Intensive
For all the promise that can come with investing in a foreclosed property, there are drawbacks. The first and most substantial con of investing in foreclosures is that you may end up with more repair work than you bargained for.
After all, foreclosed homes are sold “as is,” which means the traditional pre-sale renovations and touch-ups don’t take place. Sometimes, this merely means that the home will need a new paint job. In other cases, previous owners who weren’t paying their mortgage may not have been doing basic upkeep. A home that took years to foreclose could be in rough shape, and the reduced price and closing costs could be negated by the substantial investment necessary to make the home livable again.
Repair work that is more intensive than you realized could end up eating into your eventual profits from selling the home — making foreclosed properties a sometimes-risky investment.
Con: Cash Is King
When it comes to buying foreclosed properties, cash is king. For some investors, that’s not a hassle, but if you don’t have cash on hand, you may find foreclosed properties difficult to acquire.
Remember that when a lender is selling a foreclosed property, they are eager to get the property off their books and to a new owner. For lenders, then, all-cash offers are often preferred for foreclosed homes. This way, there’s no chance that the lender will have to deal with a foreclosure again.
With foreclosure rates back to pre-pandemic levels, competition for foreclosed properties has risen, too. If a lender must choose between an offer from an investor who needs financing and one who is able to pay in cash, they will almost always opt for the cash offer. If you want to invest but don’t have hundreds of thousands of dollars available, be prepared for challenges in the foreclosed property market.
Con: Flipping a Home in This Economy Could Be Tough
Demand for homes may be high, but the topsy-turvy state of the economy could pose challenges for those looking to flip foreclosed properties.
For one, the cost of home renovation is high, with raw materials and the cost of labor rising with inflation. Also, the threat of a recession could tamp down buyer demand. And economic turbulence could cause more homes to foreclose, leading to more investors entering the space and competing with you.
In all, investing in foreclosed properties takes serious planning. Despite some challenges, foreclosed properties offer the opportunity to yield substantial profits for savvy investors.