What Makes Buying a Foreclosed Property Risky?
After the 2008 crisis, just under 900,000 families lost their homes to foreclosures, causing the number of foreclosed properties on the real estate market to jump by 81% in just a few months. Since then, the rate of foreclosure starts has been dropping steadily, reaching its all-time low in 2020, when Covid-19 mortgage bailouts helped homeowners secure their properties. However, as these regulations are ending, the number of foreclosed homes on the market is surging again.
So, if you have been considering investing in a foreclosed property as an affordable entry point to the housing market or as a home to flip and resell, you are not the only one. But investing in foreclosed properties isn’t for everyone! This kind of investment comes with considerable downsides and pitfalls that you need to be aware of. Learn all you need to know in this guide by the real estate experts at Better Homes & Gardens Real Estate MCR Bahamas.
What Are Foreclosed Properties?
Before looking for the right foreclosed property to invest in, make sure you know what it means for a property to be foreclosed. In the video below, you can find an introduction to the foreclosure process – or read on to learn more about what a foreclosed property is.
The foreclosure of a property happens when the lender seizes it and puts its back up for sale. This is usually a consequence of failed mortgage payments. If the home you are interested in is listed as foreclosed, this means that the house is owned by the lender.
Why Are Foreclosed Properties So Cheap?
There is one aspect that makes foreclosed properties stand out in the eyes of potential buyers: their price. According to real estate statistics, foreclosed properties sell at a price almost 30% lower than other properties. But how can they be so cheap?
If a homeowner cannot keep up with mortgage payments, the house is usually repossessed by the lender or bank. In turn, the lender will be looking at recouping some of the lent money by putting a foreclosed property up for sale and charging only what they are owned by the homeowner.
Risk of Buying a Foreclosed Property
Before being up for sale at a reduced price, foreclosed properties will be put up for auction, where they can be acquired by the higher bidder. Because of this, the properties that are listed at a fraction of their price are just not ideal – although, they might carry great potential!
But what makes buying a foreclosed property risky? Here are the risks of buying a foreclosed home you should be aware of.
“As Is” Properties Can Be in Poor Conditions
Selling a property “as is, where is” or “ in its present condition” means that the seller can list the property without any warranty that that home is fit for living, safe, or in good condition. Additionally, the seller is under no obligation to invest in repairs and improvements. In turn, the buyer is the sole party responsible for assessing the property’s fitness and value.
Usually, foreclosed properties are sold “as is”, because the lender or bank will not invest in costly repairs.
However, what makes this worse is that if the previous owner of the house did not have the funds to keep up with mortgage payment, they might have not been keeping up with maintenance and repairs either! This means that the house might be in bad shape, neglected, or vandalized. And, if you are buying it at an auction, you won’t be able to see what you are dealing with!
Of course, buying directly from the bank can help you inspect your property. However, even in this case, the buyer will have to take care of all renovation, improvements, and repair costs. Here are some of the biggest and costliest issues you might have to deal with:
- Lack of cleanliness
- Property additions that are violating local regulations and building codes
- Faulty HVAC, appliances, electrical wiring, or plumbing
- Leaks, water damage, and mold
- Structural and roof issues
- Termites and insect infestation
- Bad or uncompleted renovations
- Lack of maintenance
- Unkempt, dead, or overgrown grounds
- Remaining personal property that needs clearing
The Property Might Have Been Vacant For Years
Foreclosed properties do not sell immediately. And sometimes, they might remain vacant for years – and this is after the owner usually stops taking care of it for some time! Because of this, it is not unlikely for foreclosed properties to be at the mercy of:
- Water damage
- Fire damage
Vandalism can come in many forms, and the owners themselves might have caused some damage to reduce the foreclosed property’s value or retrieve their belongings. That is why it is not unlikely to find broken windows, missing crown molds, and ruined wallpaper. Valuable items such as appliances, furniture, and decor might also be stolen from the property.
The Buying Process Can Be Long and Challenging
The process of buying a foreclosed property is different from buying a standard vetted one. That is why, if you are a first time buyer, you should always find the guidance and help of an expert real estate agent such as MCR Bahamas.
Here is what to expect from buying a foreclosed property:
- The buying process can be much longer because both parties will be dealing with the bank or lender. So, buying a foreclosed property can take longer than three months!
- You will have to deal with a lot of paperwork because foreclosed properties will require additional documents
- You might struggle to secure a loan if a home appraisal is lowered by the property damage. This can slow down the closing process.
- It can take longer for potential buyers to get a response on their bid because the bank might be sluggish in processing your request
- Larger banks with multiple properties to deal with and a consistent backlog can take over three months to respond to your offer.
Beware Of Outstanding Back Taxes and Liens
If a home has been repossessed by the bank, this is usually because the homeowner has struggled to keep up with mortgage repayment. If this is the case, the chances are that the owner might have struggled to keep up with other expenses such as:
- Property taxes
- Contractors and workmanship
- homeowners association (HOA)
If you are buying the foreclosed property, you will also be responsible for fulfilling these charges.
Most foreclosed properties will have liens and back taxes attached to them by the IRS, state, or creditors. The owed amount needs to be paid before the buying process can be completed.
The Competition Can Add Stress
Buying a house always carries a level of stress. However, in the case of a foreclosed property, you might also have to deal with the competition. After all, foreclosed properties can be a great deal!
In most cases, your competitors will be institutional real estate investors, professional house flippers, or experienced investors who know what to look for and how much to pay for it.
While it might be worthwhile to join the bidding war around a certain property, you should not participate unprepared.
Here are a few helpful tips – but don’t forget that the best option is usually to partner with an experienced real estate agent:
- A bidding ware can rapidly increase the property price
- You should consider submitting bids on several properties
- Your competitors might be ready to make an all-cash offer or opt for higher bids
- Foreclosed properties are more likely to fall through compared to other options – so, you might get a second chance!
There Might Be Hidden Costs
When dealing with foreclosed properties, there are likely to be more hidden costs than expected. As we have seen above, the cost of renovations, improvements, and repairs can substantially increase your investment. And, since you might not be able to inspect the building when buying at an auction, this can truly be what makes a foreclosed property risky!
Additionally, you might have to deal with unforeseen expenses, back taxes, and liens. To avoid losing money on a foreclosed property, calculate the after-repair value (ARV) of the property alongside its market price.
How To Avoid The Pitfalls of Buying a Foreclosed Property
Each foreclosed property comes with its fair share of benefits and pitfalls to watch out for. Partnering with an estate agent can help you sail through the buying process and avoid common foreclose property buying risks. Here are some extra tips:
- Partnering with a real estate experienced in foreclosure properties (Short Sales and Foreclosure Resource (SFR) designation)
- Negotiate on the property price to offer around 70% of the market price minus the cost of repairs
- Have enough resources to deal with unexpected costs
- Have cash at hand or a preapproval letter before you join the bidding war so that you can be ready to face the competition
- If you are thinking of professionally flipping the property, make sure to understand the ARV of the property and the cost of repairs and hidden expenses
Ultimately, foreclosure properties are ideal for those buyers who are experienced investors, have availability of funds, and are not in a rush to close a deal, renovate, and move into the property.
Sail Through The Process of Buying a Foreclosed Home With MCR Bahamas
Here at Better Homes & Gardens Real Estate MCR Bahamas, our team of licensed and specialized real estate agents has been dealing with all kinds of properties in The Bahamas and beyond. We truly understand the foreclosed property risks – but we are also aware of how appealing such deals can be for an investor.
We are here to help you sail through the process of buying a foreclosed home, avoid pitfalls, and make the most of your real estate investment. Get in touch today to learn what we can do for you.