On the surface, investing in a foreclosure home might seem like a surefire way to make money. After all, the purchase price is usually lower than the property’s market value. But foreclosures can be complex, and even a purchase that seems like a bargain is no guarantee that you’ll make money on the venture.
Here are some tips if you’re considering this form of investment:
- Know local and state laws: Before looking into foreclosure properties, become familiar with relevant state and local laws and regulations. There are numerous types of foreclosures, and each comes with a different process and timeline. In addition, laws protecting the owners of foreclosed properties impact how and when potential buyers can approach them. Staying up to date with local laws will help keep you in compliance.
- Understand the neighborhood: Properties go into foreclosure for various reasons. Some are personal, such as divorce, job loss, medical expenses, or a death in the family. But others have to do with the local real estate market. If prices drop to the extent that homeowners owe more on their properties than they’re worth, foreclosures are likely to occur. However, a house in a declining community might be challenging to rent or resell, so ensure you understand the area around the home before investing.
- Research the title: A foreclosure attaches to a specific loan rather than the home itself. So, multiple loans can be foreclosed on the same property. And just because an investor buys out a foreclosure doesn’t mean the property is free from other liens and obligations. For example, a foreclosure’s new owner may need to pay past-due property taxes. Researching the title ahead of time can prevent big surprises regarding additional debts attached to the property.
- Plan for renovations: Besides carrying back taxes or other potential debts, foreclosure properties are sold “as is.” It’s wise for investors to get an inspection to know what to expect—factor in the potential cost of renovations when determining a reasonable purchase price. Keep in mind that a run-down home in need of multiple repairs and updates will need to stay vacant for a while before renters can move in, which will delay the return on your investment.
- Consider ‘stepping ahead’ of a foreclosure: In the course of a foreclosure, the homeowner is given notice of a potential foreclosure for a certain period before the property is sold at an auction or transferred to the lender. This pre-foreclosure period can be an ideal time to contact the owner or lender to secure a purchase before the foreclosure becomes final. Investors who take this route can learn more about the property, avoid the risk of an auction, and may be able to secure better financing.
- Be patient. If you’re looking into the foreclosure market, it may be tempting to pounce on the first deal you find. But jumping to secure a property without taking the time to understand foreclosures and the specific property involved could be disastrous for your business. Missing out on a good bargain may be disappointing, but having no deal is far better than being stuck with a bad investment.
Foreclosures can be complex, but with the right amount of strategizing, research, and patience, they can be a worthwhile way to build your rental property portfolio.
About Rentals America
Rentals America provides full-service property management for residential rental properties. Our team is completely dedicated to property management, and we’re here to help landlords navigate the rental market.
