There’s no denying that foreclosures can be attractive to the individual looking for investment opportunities that are backed by tangible assets. Even though the market isn’t exactly ripe for flipping just yet (and may not be for several years to come), those with money to invest in property could purchase foreclosures for the purpose of using them as long-term investments (as in a primary residence) or even adding passive income until the time of a sale (as with rental properties). So long as you stay on top of mortgage payments, insurance, and maintenance, do a few upgrades, and wait for the market to improve before trying to sell, you’re bound to see some money back in the process. And yet, you definitely have to proceed with caution when purchasing foreclosure properties, which are often sold with the “as is” caveat. Here are a few pros and cons to consider before you buy.
PROS:
1. Low overall cost. The best and most obvious reason to buy a foreclosure property is the low sticker price. In most cases the banks are simply looking to recoup their own costs or get somewhere near fair market value. And if you find an auction you can save even more. At the very least you’re likely to pay a lot less for a foreclosure than you will for a private sale, all things being equal.
2. Attractive financing. Foreclosures are bank-owned properties. This means that the bank is trying to get rid of them. As a result, they may be willing to offer you appealing extras like lower interest rates and better overall terms (lower down payment, closing costs, settling costs, and so on) in order to sweeten the deal. Private sellers don’t have these bargaining chips on their side.
3. High ROI potential. Whenever you purchase property for less than the fair market value you stand to make a massive return on investment. Even if you turn around and sell it immediately you could make a small profit. But if you spend a little money on repairs and upgrades or wait for the market to recover somewhat, you could sell your foreclosure property for significantly more than you paid.
CONS:
1. Hidden liabilities. The main problems with foreclosures are often invisible – until you’ve taken possession of the property. This is especially true when dealing with auctions. You may find all kinds of problems with the structure itself that weren’t readily apparent before the sale. And you might also discover title issues like liens associated with foreclosed properties. Your best bet is to do as much homework as you can before you buy; but don’t be surprised if these issues pop up after the fact.
2. No recourse on “as is” properties. When you buy a home from a private owner, you have legal recourse should certain situations arise (if not disclosed at the time of sale). However, when you buy from the bank you should expect that there will be no remuneration in cases of pre-existing issues, thanks to the prevalence of “as is” addendums on foreclosures.
3. Resale. We are still in a buyer’s market, which means that you should not expect to flip any New York, Chicago, or Louisville houses you buy and remodel. This means you could be sitting on a property for a while, pouring money into it via the mortgage, insurance, and more. Of course, you could always try to rent it out to cover costs and sell at a later date. But you should expect that you may end up paying for a foreclosure property for a year or more before you’re able to sell and make a profit.