While foreclosure houses represent an incredible value in today's market, they are not for everyone.
Purchasing a foreclosure property seems like a great idea, especially in this depressed market when foreclosed houses are flooding the market. Buy a less than perfect property at rock bottom prices, fix it up, and then live in it or sell it for a huge profit.
What could go possibly wrong?
Unfortunately, just about everything.
What is a foreclosure property?
A foreclosure property is a house that the owner can no longer make the payments on. The owner was not able to sell it, so the bank took it over to try and recoup its investment.
In effect, a foreclosure property is one that the owner AND the bank couldn't sell. And don't forget that while the property might not be in perfect shape now , it was probably in decent shape when the owner was trying sell it-and people still didn't want to buy it!
Why do people buy foreclosure properties?
There are two main reasons why people buy foreclosure properties
1) As an investment property to fix up and resell.
2) As a cheap place to live when they can't afford anything else.
Unfortunately, there are problems-obvious and hidden- with each approach. Whatever your reason for wanting to purchase a foreclosure home, you should consider these top four reasons to think twice about the investment:
1) Real estate investors have already dismissed this house.
Are you really smarter than a seasoned real estate investor? Because it's likely that this property has already been checked out and rejected by a professional who thought that it was too expensive, too damaged, in the wrong area, or a million other reason. Don't learn the hard way why so many others passed this property by.
2) Foreclosure homes are sold in "as is" condition.
In all likelihood, the home has just been sitting there deteriorating for a long time. Oftentimes, the previous tenants were upset with losing the property and did some damage like removing fixtures and destroying plumbing. Banks just sell homes, they don't maintain them, so what you see (or don't see) is what you get. You'll absolutely need to pay for a solid inspection. While not every foreclosed house needs major work, many do and you should ask yourself if you are ready to put in the time and effort to make it 100% livable.
3) The house may not be as good of a deal as you thought.
Just because a house is in foreclosure doesn't mean that it's going to be a good deal. Think about it: the bank wants to make back as much money as it can off of a bad investment. Though the price may drop later on, initially, the house will probably be listed for more than it's worth. Be sure to work with your broker to do a comparative market analysis with similar properties in the area.
Also-and this is huge-you need to take into consideration how much it will cost to fix up the house. We've all been in a situation where we ended up spending more money while trying to save a little bit of money. This is especially true with a foreclosure house where costs can balloon. Be sure to get a contractor to give you an estimate on the repairs before you consider buying. And don't forget about closing costs as well!
4) You can get great deals without buying a foreclosure home.
This is probably the most compelling reason to skip looking at foreclosure properties. In this market, you can usually find a great house, at a great price, and in ready-to-move-into condition. Plus, there's a good chance that the owners will be more motivated to make the sale go through than a bank that is backlogged with foreclosures.
If you have the knowledge and can handle the financial risk, a foreclosure house can be a great deal. However, If you are not an experienced homebuyer or homeowner who knows exactly how to get work done, you should probably avoid purchasing a foreclosure.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.