Pros and Cons of Investing in Foreclosure Properties

Do you have an interest in investing in foreclosure properties? If so, then it is essential that you learn more about the pros and cons of investing in foreclosures to determine if foreclosure investing is something in which you are interested.

The Pros of Investing in Foreclosure Properties.

One of the best things about investing in foreclosure properties is the high potential for a good return on your investment. Foreclosure properties tend to sell below market value—meaning that you are often able to purchase the property for less than what the home is worth. In today’s real estate market that is already dominated by low home prices, you can find amazing deals on foreclosure properties across the country. These low prices increase your chances of making a bigger profit off your investment.

Similarly, when you invest in foreclosures you have an opportunity to purchase the property at a foreclosure auction—these auctions are listed well in advance, providing you with time to get everything together before heading to the auction floor. The opening bid of the auction is made by a representative of the lender and tends to be the amount owned on the mortgage plus any additional fees. If another bidder does not make a higher bid, then the property becomes a bank-owned home and is then put on the market by the lender (typically with the help of a real estate agency).

Therefore, if you like bidding at auctions and want to obtain a first shot at a foreclosure home, then you can get a jump start on other interested parties by attending the auction.

Another pro to foreclosure investing is the flexibility that often comes with the sale agreements. If you are purchasing the property from a lender, you may be able to obtain better financing opportunities as the lender’s way of sweetening the deal for you and encouraging you to purchase the property and remove the foreclosure home from their inventory. In negotiations, you can use this flexibility to your advantage.

The Cons of Investing in Foreclosure Properties.

On the other hand, there are a few challenges to investing in foreclosure properties as well.

When you purchase a foreclosure, you obtain the home “as is.” This means that you get the property in its current state. Sometimes foreclosure properties will need minor to moderate repairs before utilizing the foreclosure property for income purposes. For example, you may have to paint the walls and replace the carpet before putting the home back on the market (house flipping) or renting out the property. Therefore, when purchasing foreclosures make sure you take into consideration the cost of repairs.

Another challenge for foreclosure investing is that the property you purchase may have liens that you will become responsible for if you purchase the home. The best way to overcome this challenge when investing in foreclosures is to obtain a title check on the home to make sure it does not have any existing liens before you make the purchase.

Along with repairs and property liens, you may encounter competition when purchasing foreclosures. It is essential to understand that foreclosures – and other distressed properties such as short sales and pre-foreclosures – are currently dominating the real estate market. However, at the same time home prices are starting to rise across the nation as the demand for housing is rising. Therefore, when purchasing foreclosures in the current real estate market it is important to understand that you may face foreclosure bidding wars—so make sure you learn how to foreclosure bidding wars if you choose to invest in foreclosure properties.

At the end of the day, if you are interested in foreclosure investing, then it is essential that you do your research beforehand and you learn as much as possible about the foreclosure buying process. Similarly, make sure you secure financing before making an offer on a foreclosure property. Department of Housing and Urban Development has a helpful brochure that discusses how to compare and negotiate mortgage rates with lenders, which can be helpful in your search for financing your foreclosure investments. 

In conclusion, when considering foreclosure investing, make sure you know the pros and cons of investing in foreclosure properties before getting into the business.