The Risks Associated with Buying Foreclosed Properties

Fix & Flip
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11 Jan 2022
5 min read
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Looking into foreclosed homes, particularly for fix-and-flip opportunities, is a great way to find properties at much lower costs, making the return of investment (ROI) opportunity that much higher. Since foreclosed properties are typically below market value and can sometimes require minor to moderate rehabilitation to give them not only curb appeal but increase in their appraised values to market values, the financing needed to acquire and rehabilitate the property will be less, giving investors higher returns on their investment in shorter timeframes.

However, with the good comes the bad (and sometimes the downright ugly). Choosing to invest in a foreclosed property needs to be a strategic decision and it’s always best to go into knowing all the facts upfront.

These are a few of the risks and hidden costs associated with foreclosures.

If it’s not broke, don’t fix it…but it probably will be

As with any fix-and-flip property, it’s wise to invest money in necessary repairs instead of going overboard with updates and fixtures that may not suit every potential buyer’s needs. The problem with foreclosed properties is that the cost of repairs may outweigh the savings. While buying the property outright may be a fantastic deal, you have to consider all the potential things that may need to be replaced. It’s not accidental that foreclosed properties are also referred to as “distressed properties.” While not all of them will look tattered, a good many could have fallen behind on necessary fixes that the homeowners couldn’t address, either for health or financial reasons.

There are four stages of distressed properties – pre-foreclosure, short sales, foreclosures going to auction, and “real estate owned” sales, or REOs. Oftentimes, the further into the foreclosure process a property is, the more damage you’re likely to find.

Inheriting a previous owner’s debt

If a property is in foreclosure, it’s a safe bet to assume that the previous owner was strapped for money, therefore there is a strong likelihood that there may be unpaid bills and debt attached to the house that you’d inherit. This is where a lot of due diligence is needed – and some sincere honesty with yourself – to determine whether you can afford to take on a property with debt. Debt can range from construction loans to home equity lines of credit, and you don’t want to sink yourself financially before ever beginning the rehab work.

The clock could be ticking for a long time

Depending on which of the four stages you buy a foreclosed property in, you could be waiting a long time to get started on rehabbing and officially putting it back on the market. There’s plenty of paperwork that needs to be completed, response times are often slow, and banks are usually running on their own timeframe, not yours.

For example, if you decide to bid on a short sale, you’ll then be waiting on the current owners, the primary lender, and any lien holders to approve your bid. This can take months, sometimes even a year or more. Do you have that kind of time (and money) to dedicate to one property that you may not end up with in the end?

Not knowing – or adhering to – flipping regulations

Sometimes buying a foreclosed home isn’t as easy locking the doors, completing all the renovations you’d like, and flipping it. Local regulations are not uncommon and if an investor isn’t overly familiar with the local city council’s dos and don’ts on rehabbing foreclosed properties, they could incur more costs, thus pushing the project back or sabotaging it altogether. Doing your homework on local laws and regulations can help you stay one step ahead of the game and avoid any additional fees and costs.

If you’re committed to taking the foreclosed route, you’ll learn quickly enough that not all property histories are the same. Properties – like their histories– are unique and may present buyers with varying sets of challenges, but also great rewards. If you’re ready to discuss your next financing options for your next investment, contact Temple View Capital today.