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Should You Invest in a Foreclosure?

By Aly Yale – Nov 7, 2021 at 9:45AM

Key Points

  • Foreclosures can be a bargain, but they also come with unique challenges and risks.
  • Because of COVID foreclosure moratoriums, distressed homes are hard to come by these days.
  • Buying a foreclosure often takes longer than purchasing a traditional property.

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Thinking of buying a foreclosure? Consider these factors first.

Foreclosures can be tempting -- especially in today's market. Home prices are up more than 18% during the past year while foreclosures often come priced at a notable discount. 

According to property analytics firm ATTOM Data Solutions, foreclosures were priced about 36% below traditional properties at the end of last year. That's the difference between a $300,000 house and a $192,000 one -- pretty significant savings for the average American.

Still, despite the money a foreclosure might save you, they aren't right for everyone. Nor are they particularly easy to find these days.

Are you thinking about buying a foreclosure as a real estate investor? Here's what to consider before you do.

woman putting up foreclosure sign while other woman looks sad

Image source: Getty Images.

Repairs and renovations

Most foreclosures come "as-is," meaning whatever condition the home is in, that's what you get -- so don't expect the seller to pay for repairs. 

Sometimes, that's no big deal, and only minor defects exist -- things like chipped paint, holes in walls, or stains on the carpet. In others, it's much more serious. You could have roof damage, issues with plumbing or electrical systems, foundation problems, and so much more. And fixing all those? That's on you.

Often, you're not even sure what you're getting. With some foreclosures, you're not allowed to view the property before buying it. With others, you may not find problems until after putting in your offer or even closing on the home.

For these reasons, you'll need to be prepared to put in some work. You'll either need to do the repairs and necessary updates yourself or call in a contractor to do it for you. In both cases, you'll need a hefty budget to support it.

Availability 

Foreclosures aren't exactly easy to come by these days. For much of this year because of the pandemic, foreclosures were banned, which limited the number of distressed properties that hit the market. As a result, there's little to choose from in many markets, and the foreclosures that are available come with serious competition -- both from investors and from traditional homebuyers. 

To make sure a foreclosure is the right move for you, study up on the unique distressed property market in your area first. ATTOM has good data to pull from, including the top ZIP codes for foreclosures and the states and cities with the biggest upticks. If you're in one of these areas, finding a foreclosure may be easier than in other parts of the country. You can also talk to a local real estate agent for on-the-ground insights.

Timing

If you're looking for a quick, painless transaction, a foreclosure's probably not the right move. For one, the foreclosure process can take a while (the owner may not even be moved out when you buy). On top of this, the financing process typically takes longer -- especially if you're buying directly from a bank, lender, or government agency. 

Sometimes, offering all cash can help speed up the process, but it all depends on what stage of foreclosure the home is at. Generally speaking, you can expect buying a foreclosure to take a bit longer than buying a traditional property.

Other considerations

Your goals should also come into play. Are you buying the foreclosure to flip? If so, what does your timeline look like, and do you know how to add value to the property to get a good return on investment

Are you purchasing one for a low-cost place to live? In this case, you may need some interim housing while you get the home ready.

You should also take into account the risks (there could be more serious, expensive problems below the surface), as well as how the property measures up to other investments you could use your money for. 

Get guidance before moving forward

Foreclosures can often be a smart investment, but it depends on a whole host of factors -- as well as your skill set, where you're located, and your timeline. If you're not sure that buying a foreclosure is the right move, talk to your financial advisor, and consult a real estate agent for details on your local housing market. They can point you in the right direction to help you meet your goals. 

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