Risks and Rewards of Buying a Foreclosed Home
With interest rates at an all-time low, it’s a perfect time to get into the house flipping business - even if it’s just a side job. To maximize your profits, you might be considering buying a foreclosed home. However, there are some risks, and potentially higher rewards, that you take on when you decide to go this route.
Foreclosed homes are sold “as-is”
When buying a foreclosed home, the buyer needs to understand that the home is “as-is.” Buyers are able to schedule inspections, but the bank is under no obligation to make the repairs, and the price you’re purchasing the home for won’t be discounted to accommodate those repairs.
There’s competition in buying a foreclosed home
Foreclosed homes are generally at the top of every real estate investor’s list because the bank is trying to get rid of it, so they’ll sell it for cheap. Seasoned investors are able to bid with cash, instead of operating with a loan, making them more likely to win the bid. If you don’t have thousands of dollars lying around, securing your capital before buying a foreclosed home is crucial.
The condition isn’t disclosed - or guaranteed
When you’re bidding on a foreclosed home, the bank isn’t required to disclose the condition of the property to its prospective buyers. Doing a little research on the home, including when it was initially bought, how long the previous owner lived there, and when it was foreclosed on.
Buying a foreclosed home may not be profitable
When you’re looking at buying a foreclosed home, it may not always make financial sense. Even though the home is selling for a very low price, it may be because the previous owners completely trashed the house, forcing you to make major, costly repairs like new heating/air conditioning systems or a new roof.
It’s possible to find a good deal
By analyzing the return on investment and potential cap rate, you’re doing your due diligence when buying a foreclosed home. Although some foreclosed homes are in desperate need of repairs - for both safety and cosmetic reasons - others have been kept up well and are just being purchased for below-market value.
Consider being an owner-occupant
Housing and Urban Development homes can be a good deal if you’re looking for an investment property that you can live in while you’re making the repairs. HUD homes are generally marketed towards those who are looking to live in the house first, meaning less competition to buying a foreclosed home if you act quickly.
Put in sweat equity
You can cut costs by doing the repair work yourself if you’re skilled in certain areas because you’re not contracting the work out to laborers. Sweat equity goes to your bottom line, giving you more ‘real’ equity and more profit when you’re ready to sell.
When you’re ready to look into investment opportunities for buying a foreclosed home to flip in 2020, contact Renovo and talk to one of our team members to discuss how you can continue to grow your rental investment portfolio in the midst of a changing market.