Foreclosed homes are often a great way to buy real estate on the cheap. Finding homes that have been on the market for a long period of time is another way, but that’s for a different article. It can feel exciting to see a great deal in a hot area. But before you sign on the dotted line, make sure you go through the following mental checklist.
Seeing Is Believing
ALWAYS see a property before buying it, no matter how good of a deal. If you’ve seen the Money Pitwith Tom Hanks, you know a seemingly beautiful property can be quite the opposite. Bring a trusted contractor and do a complete check of the property. There may be numerous repairs which you can handle, but is the property structurally sound? Are there any plumbing or electrical issues that go beyond normal wear and tear? You need to know what you’re getting into before it becomes your problem.
How long has the foreclosure been empty? If it’s been a while, there may be hidden issues. Decay, infestations, mold, vandalism – it’s all possible if a home sits there long enough.
I mentioned getting a professional to help with your walkthrough. Make sure to also have a list of contractors that you trust once the foreclosure purchase is complete. There’s nothing worse than wasting time and money finding contractors who end up being terrible. Get your team in place first.
Buying a foreclosure is not that same as buying a typical property, there are laws. Depending on the state, these laws can have huge implications on what you can do with the property. In some areas you can’t rent out a foreclosure for 5 years. That’s definitely something you want to know going in. State and local laws are something I talk about a lot. You must know them, or have a lawyer on hand that knows them, because “I didn’t know” will not hold up in court.
Foreclosure or not, you still need to run the numbers and see if the purchase makes sense. What is your predicted rent? Subtract expenses, including expenses to get the property ready to rent, from the annual rental income. Divide that number by the value of the property. A cap rate of 5%-10% shows that the property is a good investment.