The Pros and Cons of Purchasing a Foreclosure Investment Property

Purchasing and renovating a foreclosed investment property may seem like an easy process with a potentially huge payout, in a short timeframe.  Each foreclosed property comes with its own unique set of pros and cons. The key to getting a good deal is to gather as much information as possible in order to make an informed decision and maximize your potential upside.

PROS TO BUYING FORECLOSURES

GOOD PROFIT POTENTIAL

Real Estate Owned (REO) or foreclosed properties can be an economical way to acquire a property and that means profits can be greater when you sell. The longer the bank holds the property, the greater the odds that they will consider lower offers.

MORE FOR YOUR MONEY

Foreclosures can be found in every price range and buyers can often acquire larger properties in good neighborhoods for a bargain price.  These opportunities could can ultimately lead to much greater returns.

BARGAINING POWER

Banks generally don’t want to own a property.  The cost of home repairs, maintenance, marketing, insurance, and paying taxes are a few reasons banks want to rid themselves of a foreclosed property. With this information and the right negotiation tactics, a smart investor can take advantage of banks that prefer to sell the property quickly.

CONS OF BUYING FORECLOSURES

COST OF REPAIRS

Foreclosures are sold “as is” and these properties may be in terrible condition, meaning costly repairs may be needed.  Some properties, such as those in the auction or REO stage of foreclosure don’t come with a seller disclosure to inform you of problems. Additionally, investors are typically also unable to access or inspect these properties making efforts to assess repair costs even more difficult.  

WRANGLING RED TAPE

Getting financing from a conventional banker for a foreclosed property can be a lengthy process with a lot of red tape to wade through. Buyers often choose to go with hard money or private lenders because their loan process requires less paperwork and the process is completed in 2-5 days instead of the typical time period of 30-60 days from a bank.

HIDDEN COSTS

Foreclosures sometimes come with significant debts such as unpaid taxes, construction liens, IRS liens, or other encumbrances.  A reputable title company can run a title search to uncover any potential landmines prior to purchase.

IMPORTANT REMINDERS:

  • Foreclosed properties are sold “as is.” The seller doesn’t take any responsibility for the current condition of the property and they will not make repairs.
  • Be sure to have a thorough home inspection to identify problems and consult with a general contractor to estimate repairs. Even so, remember that repair estimates are only estimates and not necessarily guaranteed.
  • Sometimes, home inspections miss potentially costly problems. Homes that are vacant for months or years likely have been exposed to the elements and that means there is more risk of damage to the home. Mold, damaged plumbing and wood rot are just a few things that are difficult to detect in an inspection. Those types of things can play havoc with your budget.

Despite a few inherent challenges, there are real opportunities to buy foreclosed properties at below-market prices and to resell them later for a healthy profit. If the deal is negotiated well and responsibly, foreclosures can be a very smart investment. Working with a lender who understands the ins and outs of the foreclosure process will result in greater success.

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ABOUT LONGHORN INVESTMENTS

Longhorn III Investments, LLC is a direct private lender offering short term acquisition and renovation capital to real estate investors for both residential and commercial assets.  We operate in major metropolitan areas throughout Texas, Missouri, Indiana, and North Carolina.  Highlights of our loan program include:

– Up to 70% of ARV (after repair value)
– Finance up to 100% of cost
– Close in 3 – 5 business days
– No income requirements
– Streamlined, simple approval process
– No pre-payment penalty

Longhorn was formed in 2008 and has funded over 1600 loans since inception.  Our complementary businesses include a title company and real estate law practice operating out of our corporate office.  Our wealth of experience puts us in the unique position of being able to help investors through all aspects of each transaction.