Foreclosed homes can provide considerable savings to purchasers. But discounts aren't the only thing these places have to offer. Foreclosures may also be good investments for individuals wishing to repair up houses and resell them for a profit. It's crucial to realize that foreclosures don't come without consequences. If you're thinking about buying one, be sure you understand the whole spectrum of dangers and advantages before proceeding.
Key Takeaways
- Purchasing a foreclosed home might be a less expensive and quicker option to invest in real estate.
- You will most likely be unable to see a foreclosed property before purchasing it, and it may require extensive repairs.
- The foreclosure market is competitive, and you will need cash beforehand to utilize at the auction.
What Happens During a Foreclosure?
If a homeowner fails to repay their mortgage on time, the lender will take the property and sell it to recoup its losses. The actual foreclosure procedure varies depending on the state, although in some circumstances, municipal courts may be engaged. Foreclosure usually begins three to six months following the homeowner's first missing payment.Reasons for Foreclosure
For numerous reasons, homeowners end up in foreclosure. Job or pay loss is one of the most prevalent. According to a poll of homeowners facing foreclosure, 54 percent blamed their home's foreclosure on a decrease in income or unemployment. For example, in August 2020, 5,599 houses in the United States went into foreclosure, barely four months after unemployment peaked in April. While this figure was up 24% from July, it was still down 80% from August 2019. This might be because of safeguards put in place for homeowners who were in financial problems during the outbreak. Homeowners fall behind on their mortgage payments for a variety of reasons, including sickness, excessive financial responsibilities or debts, and marital troubles. The majority of homeowners in foreclosure may be low- to moderate-income, making a job loss or income cut all the more difficult.Pros and Cons of Buying a Foreclosure
Pros
- Lower cost.
- Closing time is reduced.
- Possible investment opportunity
Cons
- You might not be able to examine or inspect the house before purchasing it.
- Several repairs may be required on the property.
- Market competition.
- You may require a huge sum of money.
Pros Explained
Lower Price
"The apparent benefit of purchasing a foreclosure is the price," explained real estate agent Yawar Charlie to The Balance. "In general, foreclosures are properties that are offered at a discount from their market value." It's true: foreclosures may provide significant discounts. According to real estate data aggregator ATTOM Data Solutions, the average price of a foreclosed property over the previous five years has fluctuated from around $93,000 to $166,000. That is much lower than the yearly national average for each of those years.Faster Closing Process
According to Michael Gevurtz, CEO of Bluebird Lending, foreclosures are often short processes that take roughly 30 days from start to finish. According to Ellie Mae, the average time to close in October 2020 is 54 days.Potential Investment Opportunity
Purchasing a foreclosure and then rehabbing it can allow you to raise the value of the house and generate quick equity. If you're an investor trying to renovate and flip the house, this might imply a good return on investment, especially if you make the correct modifications. If you want to reside in the home for an extended period of time, a foreclosed property may yield more profits when you decide to sell later. In 2019, house sellers made a 34 percent return on their initial investment.Cons Explained
You Might Not See or Inspect the Home Before Buying
The majority of foreclosures are sold "as-is," which means that what you see is what you receive. Some purchasers may be disappointed if they are unable to view a home or have it properly assessed before putting a bid. "Normally, you don't have access to the inside of a home before purchasing it," Gevurtz explained. "They can only be seen from the street or from ground-floor windows."The Property Might Need Several Repairs
Foreclosures may require extensive maintenance owing to lengthy periods of vacancy, the prior homeowner's inability to maintain the house, or even harm caused by the previous resident. "The property may have been left in disrepair, and the seller may have removed not only the appliances but even basic fittings for some of the systems," Charlie speculated. "Anyone who buys the house will have to pay for such repairs and changes once escrow closes." Before purchasing a foreclosed house, be sure you have the funds in your budget to undertake any necessary repairs. According to Auction. com's 2020 poll of real estate investors, spending at least 10% to 20% of the purchase price for renovation is the standard in a foreclosure sale.Competitive Market
According to Gevurtz, there are a lot of individuals bidding for foreclosures, so getting one straight immediately may be difficult. "It's a really competitive business, so stuff moves rapidly," he remarked. Because of the epidemic, many auctions have moved online, making this more accurate than ever. The option of online or remote bidding enhances the interest of two-thirds of investors in a property. Foreclosure moratoriums and mortgage relief initiatives in 2020 have also reduced the amount of foreclosed houses on the market, resulting in even greater competition.You May Need a Large Amount of Cash
Aside from rehab fees, you may require a significant amount of cash up front, especially if you're purchasing the foreclosure at auction. Cash bids are frequently requested at these events. However, if you are not bidding at an auction on a foreclosed property and have strong credit, you may still be able to finance it.The Bottom Line
Foreclosures have several distinct advantages, including significant potential savings. However, there are a number of concerns to consider. If you do decide to acquire one, consider the prospective repair expenses and learn everything you can about the property before proceeding. If you are unable to visit or inspect the home, driving by it and examining property records may be viable solutions. Finally, ensure that you are working with a trustworthy real estate agent or real estate attorney. They can guide you through the procedure and ensure that you are as safe as possible.