Foreclosures are a great way to invest into the real estate market, but it needs to managed carefully.
Most investors aren't going to get rich quickly by purchasing a distressed property and then turning it around for a profit or to create rental income.
Foreclosures are often sold on an “as is” basis, which means there are likely some repairs that will need to be made in a home that is tempting.
These tips for investing in foreclosures will help you find long-term potential profitability.
1. Determine Your Potential for Profit First
The price of a foreclosure is typically what the minimum a bank is willing to take for the property in the first place.
Many jurisdictions required foreclosed properties to be sold as close to market value as possible.
If you have a property that is priced at $130k and you estimate it needs $50k of repairs, there isn't much profit potential in that home if the market price is just $185k.
2. Mortgage Rates Are More Important Than Mortgage Payments
Many first-time investors look at the actual mortgage payment as the way to make money, but the mortgage rate is more important.
If you pay less overall interest on your foreclosed property while you own it, then you have more equity in the property that can be used to your advantage.
Having a $1,200 monthly payment at 7% interest isn't as good as having a $1,400 monthly payment at 4.25%.
3. Location Really Does Matter
Purchasing foreclosed homes is a business venture, so look at the property as if it were a marketing opportunity.
How close is it to local schools? Are grocery stores and other shopping options a short distance away?
Even where the closest fire hydrant is compared to the property location could be important as it may affect home owner insurance rates.
Quick profits generally need to have a recovering real estate market to succeed.
You might find an amazing deal in a bad market, but that means you may need to hold onto the property for 4-5 years before it will sell.
4. Visit the Property Owner That Has a Notice of Default
Many foreclosure investors will receive information about a loan in default in their local community, but won't do anything more than throw a postcard in the mail as a cold call effort.
People in default may be willing to work with you and their lender to purchase the house on a short sale instead and that is to your advantage.
When the owner is involved in the process, the property tends to be left in a better condition.
Showing up with coffee in hand and a proposal can often generate a sale.
5. Be Careful of Multiple Liens
A vast majority of foreclosures occur because the property owners have been unable to pay their monthly mortgage on time.
If property owners aren't paying their primary bill, then there's a good chance they haven't been paying other bills as well.
Watch out for properties that have multiple liens on them that have yet to be cleared to save some cash.
Foreclosure properties are an amazing opportunity to invest when properly managed.
These five tips will help you do just that.
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