Buying Foreclosed Homes: Is it Worth the Risk?

by | Mar 4, 2019 | Property Types and Niches

Guest Author: Catherine Way graduated from Michigan State University with a Bachelor of Advertising degree, specializing in Graphic Design. She spends her free time finding new ways to talk to people, through writing, designing, dancing, and more. You can see her newest creations here.


Foreclosed homes are always on the minds of real estate investors.

Many think of foreclosures as ticking time bombs, a sign of which way the marketing is heading, while many more see them as goldmines for investment opportunities. 

Real estate investing is a risky business, but for those real estate investors looking to find truly undervalued properties, foreclosures are a great option.

A foreclosed home may be a once-in-a-lifetime chance to pursue a dream of house flipping.

So, Are Foreclosed Homes Worth The Risk?

Pros and Cons Of Foreclosed Homes

For those looking to make a high profit on their first flip, a foreclosed property can be a goldmine.

Pros Of Investing In Foreclosed Homes:

Foreclosures offer extremely undervalued homes, with motivated sellers, and high chances to make the most of the after repair value.

Foreclosures can be in great locations, extremely cheap to buy, and easy to flip and make a profit, making them an easy pick for real estate investing.

Cons Of Investing In Foreclosed Homes:

The biggest risk of buying foreclosed homes isn’t the poor state of foreclosures, but rather the high competition from other investors.

Wholesalers, flippers, investors, and landlords are all looking to expand their real estate investment efforts. That means when a foreclosed home goes on the market, real estate investors have to move quickly or it will be gone.

Another risk with buying foreclosed homes is that they may require costly repairs to make market ready.

When a home is foreclosed on, the property tends to get trashed. It may be in a need of some serious repair, such as plumbing, foundational problems, or need a complete rehab to make it desirable.

These high-cost repairs are hard to break even on and even harder to balance out. They can be in bad locations, which would make flipping or renting a property difficult.

Finding Foreclosed Homes

Finding a foreclosed home may be easy, but finding a great investment opportunity for your foreclosed home is much more difficult.

Many real estate investors swear by auctions for finding foreclosed homes. Auctions are great for finding extremely undervalued homes, but they aren’t risk-free.

Auctions are very competitive and don’t allow investors the time to properly walk through the home and inspect it to calculate potential after repair value or return on investment.

Working with a realtor, or even a wholesaler, is a great way to take a full assessment of the foreclosure and may be the best way to minimize the risk in your property. Wholesalers have lists of investment opportunities and are often very motivated to move a property.

Working with a realtor ensures that you know the risks and reward of your property, but the process may move slower than an auction.

Buying Foreclosed Homes with Hard Money Loans

“Foreclosures are great real estate investments, but many traditional lenders see the risk and not the reward on these properties. That’s why more real estate investors are using hard money loans to buy foreclosures.” – Loren Howard, Prime Plus Mortgages, Arizona Hard Money Lender

Hard money loans make buying foreclosures easy, and even removes some of the risk for purchasing foreclosures as well.

Unlike traditional loans, which are tied to credit scores and the current value of the home, hard money loans are based on the after repair value of a home. The after repair value of the home is based on comps of similar properties (once fully repaired).

A hard money loan makes it easy to buy, repair, and profit from foreclosure real estate investments. Real estate investors can also close on properties faster than ever because hard money loans aren’t credit based and can be funded in as little as 48 hours by lenders like Intrust Funding.

Hard money loans come in a variety of types for real estate investors, such as bridge loans, fix and flip loans, home rehab loans, and more. Each of these loans is based on the after repair value of the property, making applying and approving these loans fast and easy.

Summary

Investing in foreclosures can be risky, but if a real estate investor takes their time to locate, fund, and repair the property, then the reward can be extremely high.

  • Pros of Foreclosures:
    • Cheap properties
    • High After Repair values
  • Cons of Foreclosures:
    • Expensive repairs
    • High competition
    • Risky if in the wrong location
  • Finding foreclosed homes:
    • Using a realtor and wholesaler is a great way to inspect properties
    • Auctions move fast, and don’t allow for proper inspections from investors
  • Funding foreclosed homes
    • Hard money loans make it easy to fund foreclosures with a large variety of loan programs and asset-based funding

Have You Ever Invested In A Foreclosure?

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