Buying a rental property can be incredibly exciting and terrifying at the same time, especially if it’s your first rental. For a lot of buyers today, the idea of getting a killer deal is the ultimate goal, one that you may have heard is possible with a bank-foreclosed property (also known as a “foreclosure” or “real estate owned” property or simply “REO”). Real estate prices over time are only going up, after all, so what’s the scoop on foreclosures?
Can You Get a Deal on Foreclosed Properties?
Absolutely!….but it’s a tricky question with a lot of caveats. In some markets, it will almost certainly be easier to take advantage of foreclosures to find lower entry price points. Other markets may not offer a lot of financial benefit to the buyer. When market inventory is low in the property type and area you are shopping for, prices will tend to trend higher, even for foreclosed properties.
On the other hand, if you’re pretty flexible and aren’t overly concerned about neighborhoods, an area with a lot more inventory can be a difficult place for a seller, creating a super local buyer’s market. Even banks are sensitive to these pressures, and since they can be more flexible about their pricing, may discount foreclosures more sharply in order to unload them.
What Should You Know Before Making an Offer on a Foreclosure?
If you manage to find a steeply discounted property that you are interested in, there’s still a lot to consider before making an offer. The caveats with foreclosures are many, but they can still work for buyers who go into the transaction with their eyes wide open.
Be aware that:
- Foreclosures are almost exclusively sold “as is”. Yes, that means you get what you get, and since there’s unlikely to be a good history, it may be a lot worse than you imagine. You could get lucky and totally win the foreclosure lottery, but remember that many foreclosed properties have been sitting vacant for extended periods with little to no maintenance or human interaction, which can encourage insect and animal infestations on top of problems you’ve been made aware of.
- Always get a home inspection with a foreclosure. In most areas you can still back out of the transaction if the condition of the home is worse than you imagined, though be aware that these inspections are limited in scope, and surprises may still be hiding. Sold “as is” means just that, though. Banks aren’t generally interested in fixing anything, so if your inspector says the A/C is bad and the roof is leaking, you’ll need to figure that into your overall cost equation.
- Foreclosures can be very competitive. Investors often really like buying foreclosures, which means you’re going to be competing against other buyers who have a lot of cash on hand. Cash deals close faster and there’s less risk they’ll fail to close because of lending issues, which makes them pretty nice for a seller. A good foreclosure is likely to be a competitive buy, so be fully prepared, fully qualified for your loan, and ready to make your highest and best offer out of the gate. You may only get one shot.
- Foreclosures can be difficult to finance. Some foreclosures and lending programs are meant to go to future homeowners, but most are not especially friendly to non-investor buyers. You’ll need a substantial down payment, high credit score, solid debt to income ratio, and reliable employment for a bank to take that level of risk on a home that may become a money pit. It can absolutely be done, but this is far from a basic first time homebuyer sort of process. Loans like lines of credit may be the best initial option to use, depending on the condition of the property.
- Foreclosures can be difficult to close. If you have to borrow to buy a foreclosure, expect the process to take months. Even if you don’t have to borrow, there are layers of red tape to cut through, because you’re dealing with a corporate owner rather than an individual. Allow plenty of time to get through all the steps of the process and be prepared to have to pivot into a different loan program if things get dicey. Sometimes you won’t know if you will actually close on the property, as most jurisdictions will allow the current owner until the “11th hour” to come up with the money to pay the lender.
Should I Buy a Foreclosed Home?
If you’ve thoroughly prepared yourself for owning a home with a poorly documented history and a higher than normal risk of unexpected problems, as well as the stressful buying process that can go with it all, then absolutely buy the foreclosure if it’s right for you. Sometimes foreclosures are the only way to get into the right neighborhoods or even find a home in your budget, so there are definitely reasons to pull that trigger.
Once you have closed, though, you will probably need a lot of expert help. Don’t forget to lean on us.
We are here to help
If you are weary from the headaches of maintaining and renting out your property, Westhawk Property Management is here to help. We provide professional service to all properties we manage and offer Concierge service to owner-occupied homes so we help you to find roofers, electricians and other home pros to help you get jobs done.
The Westhawk Property Management team of professionals are here to help you build wealth through real estate investing. We will free you up to pursue your career, spend leisure time with your families, while at the same time saving you costs and frustration. Call us today to discuss how we can be of service to you.