A sluggish economy offers many bargains in real estate. Recessions are typically accompanied by the increased availability of foreclosures for sale. The ability to purchase homes at much lower prices makes them ideal for many investors. Seasoned professionals have made fortunes from buying up foreclosures and then selling them at marked up prices. However, there are some downsides to buying foreclosures that investors need to be aware of. Here are three cautions that investors should heed when they’re considering making a purchase on a foreclosed home.
Hidden Repair Costs
Investors may find themselves spending more than anticipated on foreclosed homes. Poor maintenance is a key characteristic of foreclosed property. If the previous owners did not have the money to keep up with their mortgage payments, it’s certainly likely that they did not keep up with the maintenance. Homes that have been abandoned by the owner often attract vagrants or vandals. Banks are notoriously bad about maintaining foreclosed property, increasing the likelihood of neglect.
Some maintenance issues are a quick fix while others are costly to address. The cost of rehabilitation can average $45K in some markets. Even restoring one room can significantly add to the price tag of a foreclosed home. The average cost of restoring a bathroom is $3,500 and a kitchen can average $6K. These expenses should be taken into consideration when you’re looking into a foreclosed home.
Even good neighborhoods can have its share of foreclosures in a bad economy. Still, too many foreclosures in one neighborhood can send negative signals to buyers. This can create problems if your investment goals are short term. It may take years before the stigma wears off and buyers are willing to take a chance on your property.
A high foreclosure rate may also point to other community problems that buyers are typically wary of. If the home is located in low-income community, this impacts your ability to sell the home in the future. The neighborhood is likely to lack quality public schools and employment opportunities – things that buyers look for when deciding to purchase a home.
While foreclosures are sold for lower prices, finding financing can still be difficult. Many banks will not provide funding for homes needing extensive repairs. Some lenders won’t provide loans on foreclosures altogether. It’s important to have a clear plan on how you will finance your purchase.
Foreclosures can still offer great opportunities for investors. Research is the most effective tool in avoiding money-draining properties. Bringing an experienced contractor can help you catch maintenance issues that would normally be overlooked. Researching the neighborhood and your financing options will help you determine whether a foreclosure is a good investment for you. If you are willing to take some of the risks and can overcome the obstacles, a foreclosure may prove to be an excellent investment. When purchasing foreclosures, the potential for profit can outweigh many of the pitfalls.