What Makes Buying A Foreclosed Property Risky?

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Homebuyers save a lot of money buying foreclosed homes, but at what risk? Whether you buy a home undergoing the foreclosure process at an auction or from a real estate agent, you buy it ‘as is,’ which means that your foreclosed property may come with a few nasty surprises that you won’t be able to lower the purchase price with.

What’s so risky about it? Here are a few considerations that real estate investors need to bear in mind when they’re going into the buying process.

The House May Need A Lot Of Work

You’re buying a home that the owners couldn’t afford anymore. If they didn’t pay their mortgage, they probably couldn’t afford home maintenance and repairs either.

If you buy the home at a foreclosure auction, you get what you get.

You usually can’t have an inspection completed. You don’t find out until after you own the foreclosed homes what’s wrong with them. You may get a money pit and not know it until it’s too late. This is ultimately what makes buying from a foreclosure sale so risky.

If you buy the home from the bank with a real estate agent, you may have an inspection, but don’t expect the bank to make any concessions if the property is in bad shape. You still buy the home as-is, but at least you know what you’re getting into if you were to become the property owner.

How to minimize the risk: Look at the exterior of the investment property and look through windows. If you see neighbors near the home, talk to them to see what they know about the property.

It May Be Hard To Get Financing

Regular financing from a bank, such as FHA or conventional financing probably won’t be an option for real estate investors in this scenario. Both programs have rehab loans, but they are complicated and take a long time. You don’t have that kind of time when fixing and flipping.

Hard money loans help move things along faster. If you’re fixing and flipping it’s a great option, but you have to know where to look.

How to minimize the risk Look for loans before you bid on a property. Having financing in order speeds up the process too. Look at hard money lenders for the quickest financing options.

You May Get Stuck With Liens

Unless you pull the title before you buy the house, you don’t know what you’re buying. Liens on a home follow the property, not the owner. In other words, for you to take possession, you must clear the title which may mean paying more fees. In many counties, these liens are part of the public record, which means they’re more easily available. 

Common liens found on properties are old mortgage liens, tax liens, and mechanics liens. This takes away from the profits that can be made on an investment property.

How to fix it: Get as much information as you can. Check the courthouse records to determine if there are any liens.

For more guidance on whether or not a lien follows a foreclosure sale, this foreclosure defense law firm has a great video that explains when liens are released and when they follow the sale.

You May Not Know The Actual Value

You usually buy a foreclosed property at a much lower price than its market value when you buy it from a foreclosure auction. You need reliable information to ensure you’re making a good investment if you’re planning to buy from a foreclosure company.

Not only do you need the current market value of homes in the area, but the potential after-repaired value once you make renovations. Only then can you determine if the home is worth it. Without a reputable appraiser and/or real estate agent, you may not know the home’s true market value which could be risky. It’s important to beware of properties holding common risks like needing major repairs like water damage or a leaky roof.

How to minimize the risk when foreclosure investing:

Do your research. Talk to contractors and appraisers about the work you plan to do. You may learn the work isn’t worth as much as you thought. This type of investing isn’t for everyone and there are other ways to earn profits through real estate. 

You May Have Competition

You probably aren’t the only investor looking at foreclosure auction properties in the area. If you don’t act fast, you may lose the chance to buy the investment property.

How to minimize the risk:

Have all your ducks in a row. Get your financing in order, know the values in the area, and how much you want to bid taking into consideration the desired profits. This way you’re organized and ready to bid, and possibly even outbid other potential buyers

Any Home Purchase Is Risky

Buying a home is risky whether you know its condition and everything about it or not. Buying a foreclosure has a few extra risks, but with the right legwork, you can minimize the risks of a loss.

Form your ‘team’ of experts including a real estate agent, lender, and contractors so you have everything ready when it’s time to buy a home. Minimizing what makes buying a foreclosed property risky is the best way to enter the transaction with confidence and come out with profits.