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.
At Renovo Financial, we’ve been able to identify five rental property trends happening, even with everything going on in the world.
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.
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.