If you have been planning to buy a home, you may be looking at purchasing a foreclosed home from a bank or investor as an option. While buying foreclosures is an attractive strategy for many people, it bears both risks and rewards.
The biggest reward of buying foreclosed properties is that you can often obtain a deep discount – between 35 and 45 percent, off the market value of the home. This gives you quite a bit of room to profit from the resale of the home, particularly if you can find a foreclosed property that only needs cosmetic repairs and upgrades. On a $200,000 home, you could make as much as $90,000 profit, minus repairs and fees.
One of the downsides of investing in foreclosed properties is that it takes quite a bit of work and research to find good investments. You will need to be able to research opportunities and determine whether they will make profitable investment. This is where a good real estate agent can help you tremendously. They can research the comparables and advise you on the values in the neighborhood.
One of the riskiest aspects of buying foreclosed properties is that underestimating the amount of repairs required on the property. Even with a home inspection to help identify the potential issues with the home, it can sometimes be difficult to determine the total cost to get the property in proper condition.
Another common problem when buying foreclosed homes is title encumbrances. While the closing attorney will perform a title search (although this can be expensive) to make sure you will be able to obtain a clear title for the property, the do this to protect the lender and not you. We also recommend purchasing an enhanced owner’s title policy to best protect your interests in case there are any issues with the title with the property. With all the foreclosures happening in today’s market, we are finding that even with title searches, there are issues with title and you want to make sure that you are covered.
Typically, a 3 to 10 percent down payment will be required for the purchase of a foreclosed home depending on if it can be financed as FHA or conventional loan. If the property needs repairs, they cannot typically be financed unless you get a special FHA loan called a 203K loan. This type of loan typically requires an owner occupy the property and is not for investment homes, so you need to make sure that you have enough money to pay for these repairs.
There is a lot to consider when purchasing bank owned properties, so make sure that you are working with a team of professionals to make sure that you have all the information that you need to make a good decision.