In February, the median sale price of an existing home rose to $357,300, according to the National Association of Realtors, marking a 15% increase from the previous year. With property values soaring nationwide, you may be thinking of investing in a foreclosure to add to your property portfolio. There can be benefits to going this route, but there can also be a lot of risks.
The advantage of buying a foreclosure
The main advantage of buying a foreclosed property? The option to get a discount.
You are generally looking to pay less for a foreclosure than a comparably sized property that is voluntarily sold. And so that gives you some solid opportunities.
First, you could put money into a foreclosure to get it up to snuff, then convert it into an income property. This might be a good way to go if you don’t need your capital back immediately and you’re willing to sit back and let that property appreciate in value.
You can also consider buying a foreclosure, taking a quick spin, and selling it for a short-term profit. This is an option to consider if you don’t want to be too cluttered with a single property.
The downside of buying a foreclosure
It’s true that you could get a seizure at a discount, but there’s a reason for that. Foreclosed homes are often left in disarray, and from there it’s up to the buyer to pick up the pieces.
In some cases, that might mean making minor repairs. But often that means dealing with major issues – things like replacing a roof, overhauling a heating system, or repairing a damaged foundation.
All told, when you buy a foreclosure, you risk incalculable expenses that eat away at or wipe out your profits, especially if you’re in the house flipping business. And that’s a risk you might not want to take.
Moreover, in some cases, you will not even be able to determine the scope of a seizure before buying it. If you’re buying a foreclosure at auction, for example, you’ll usually have to make a demand bid. This could open the door to additional savings on your purchase price, but also to additional risk.
Should you buy a foreclosure?
Currently, seizures are not so easy to find. The reason? Home values are at record highs, which means fewer homeowners are underwater on their mortgages. This means that many people who can no longer afford their mortgage payments have the option of simply listing their home and selling it.
Additionally, in the wake of the pandemic, mortgage managers are working with homeowners to keep up to date and keep track of their home loans. Many offer the option of loan modification to help homeowners keep their home rather than lose it.
Still there are foreclosures to find – but whether you should invest in one will largely depend on your personal risk appetite. If you’re a more conservative real estate investor looking to build a portfolio of income properties, you might want to stick with unencumbered homes. If you’re into house flipping, foreclosures offer more appeal. But even then, you will need to understand the risks you are taking.
All in all, there is no right or wrong answer, especially since each entry is different. But if you’re considering investing in foreclosures, just be prepared for a world of repairs. And if you return a foreclosure, aim for a market where demand is high and inventory is low. That way, you’ll have a better chance of getting out financially, even if your repairs cost more than expected.
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