These 10 tips will help ensure you consider all angles of buying a foreclosed property.
In 2012, my partner and I purchased some Atlanta, GA, real estate in the form of a three-bedroom, two-bath, 1,450-square-foot ranch home in good condition. The home had previously sold for $97,000 during the peak of the housing market, but we snapped it up for only $21,000. We set out to renovate the house and put $10,000 (plus some “sweat equity”) into repairs and remodels, bringing our total costs to $31,000.
Why was it so cheap? It was a foreclosure.
Not only was the home itself a foreclosed property (it was listed as an “REO,” or “real estate owned” by the bank), but it also was located in a high-foreclosure area. Slowly, as other buyers purchased neighboring foreclosed homes in the area, property values started to rise.
Now, that house is worth approximately $55,000 — roughly double our acquisition price.
So, should you buy in a high-foreclosure area? While foreclosed properties (and their surrounding neighborhoods) can offer great deals, there are also certain issues to watch out for when buying in an area with a high concentration of foreclosure homes for sale. Here’s why you may (or may not) want to buy a home in an area that’s still heavily affected by foreclosures.
What are the benefits to buying in a high-foreclosure area?
Banks generally don’t want to hold on to REOs for too long — each month that goes by means another month of taxes, maintenance, and other costs they have to cover. Because they’re eager to unload the property, they may offer a significant discount (which means smaller mortgage payments for you!).
Likewise, if a neighborhood is filled with discounted houses, then surrounding properties will also sell at a lower price — even if that specific property isn’t a foreclosure.
You can find foreclosure properties at a variety of price points, from tiny bungalows to sprawling luxury homes, so whatever your current budget, there’s a good chance you can snag a deal on a foreclosure.
If you buy a foreclosure that’s a little rough around the edges, you can make repairs and upgrades that will add to its value. When it comes time to sell, you could price the home for considerably more than you paid for it.
And there are benefits even if you buy a home that wasn’t a foreclosure but located in a high-foreclosure area. Once other buyers snap up the remaining foreclosure inventory in your area, you may still experience significant price appreciation.
Foreclosures bring down the overall value of the whole community. When you buy one of these homes and put in the work to improve it, you’re adding stability to the community and participating in neighborhood recovery. If others are also dedicated to improvement, you could find yourself in a close-knit, active community that’s on the upswing.
What are the drawbacks?
Since they’re priced so low, foreclosures can get snapped up quickly. Be prepared to act fast and possibly face a bidding war.
Many foreclosures are sold as-is, and repair costs could seriously negate any savings you’d receive. The previous owner may not have been able to afford basic maintenance and upkeep, or might have intentionally trashed the home upon move-out. If the home has been empty for a while, it could have suffered a burst pipe, mold growth, or pest infestation. Empty homes are also prime targets for looting and vandalism.
Communities with a large amount of foreclosed properties often suffer other issues like higher crime rates, which may make the home not the right investment for you.
If there’s a lien on a foreclosed property, you could find yourself paying off the previous owners’ debts. If the previous owners haven’t left, you also could have to pay for eviction proceedings.
Time and frustration
Buying an REO can be a time-consuming and frustrating process, with lots of paperwork to fill out and red tape to cut through.
Slow to appreciate
While you may make capital improvements to the home, that doesn’t necessarily mean its value will appreciate. Foreclosures can weigh down overall market values in a neighborhood, so buying in a high-foreclosure area means your home could take longer to appreciate (even if your house isn’t a foreclosed property).
Is buying a home in a high-foreclosure area worthwhile for you? Let us know in the comments below!