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Investing in foreclosures has certain potential benefits, like the ability to purchase for well under market value, a high return on investment (ROI), and a lower risk than stock market investments. Foreclosures can be risky for investors to the degree that the real estate market does not decline to a point below the price of the foreclosure acquisition.
For those losing their property due to foreclosure, a primary consequence is a decrease in credit rating. However, a timely foreclosure may allow the property owner to avoid declaring bankruptcy for all assets and to preserve ownership and credit responsibility for other assets and debt requirements.
Buy for Well Under Market Value
Foreclosures are often priced well under similar non-foreclosed homes. This is because the bank, unlike an owner, cares more about getting the property out of the books than making a profit from the home. Reasonable offers have a good success rate, and homes can be turned around and sold quickly.
The Right Timing Can Give You a Higher ROI
In 2008, close to 20% of home sales were of homes that had been repossessed by the bank. Short sales, where the owners owed more on their property than it was worth, accounted for another 11% of home sales that year. The hardest impacted area was Madera, California, where nearly 55% of home sales were bank-owned properties, and over 3% were short-sale properties, according to CNN Money.
Timing your investment to coincide with a down housing market or a weak economy can open up rare investment opportunities and allow you to be choosey about what investments you make. Similarly, selling your investment to coincide with an upswing in the market or economy can bring in more money and a higher ROI.
Less Risky Than the Stock Market
Although buying low and selling high works for both stock market and real estate investments, it is easier and less risky with foreclosures. The stock market can swing wildly from day to day and stocks can plummet without notice, but a piece of property is almost always a good investment. This is especially true when it was obtained for well under market value, as foreclosures often are. In a worst-case scenario, you should at least be able to resell the property for as much as you bought it for.
The largest pitfall that comes with home foreclosures is the drop in credit rating. The bank or finance company that holds the loan on the home will report your failure to pay to the top credit agencies. A low credit rating can affect your ability to get credit in the long run. It’s better to try and pay your mortgage company and continue to make your payments late every month than it is to completely stop paying your obligation.
Losing Your Home
Failure to pay your mortgage will result in a default of the loan. When you go into default, the finance company will come and foreclose on your home. The company will offer the house for the amount you owe on the property or for the amount of your home note minus the amount you owe on the loan. The bank will file the necessary paperwork and have you evicted. It can then sell the property to prevent any further loss in its investment.
When the bank sells a foreclosed home, it will generally sell the house for the amount of money still outstanding on the property. The owner of the home is then left responsible for the difference between the amount of the sale and the amount of the loan. This can leave you with a bad credit rating and make it very difficult for you to rent or own additional property. You can also lose a great deal of money depending on how much money you have already put into your home.
Debt is incurred during a foreclosure when the bank or finance company sells the home for less than the original price paid. The difference between the selling amount and the amount left on the loan will still be the responsibility of the individual who held the loan. .
Inspections generally range from $300 to $500. They are usually required for a property that is being financed, but they are also a good idea for properties that are not being financed. An inspection will give you an idea of what is wrong with the property. From there, you can determine how much the repairs will cost.
After you get an inspection, you can begin pricing repair costs. You can hire someone or fix the repairs yourself. The latter will be cheaper but will take more time. Call around to get a price quote on the repairs, or make a list of everything you will need to repair the property and get a price quote for those items at your local home improvement store. Make sure you take landscaping into consideration. If the home has not been occupied, there may be a lot of fixes needed to the land surrounding the home.
Penalties and Fees
You may be subject to penalties and fees by the county if you don’t get the property up to standard quickly after buying it. If you know you may not be able to fix the property right away, factor these penalties and fees into your total cost.
Between January and March 2009, reports of foreclosures, defaults, and repossessions topped 800,000, according to the U.S. report on foreclosure filings. Foreclosed homes can be a good bet for investors, but they can also come with a lot of unexpected costs. Before you invest in a foreclosed home, it is important to get a sense of how much money you will need to put into the property, instead of focusing on the price you are paying for it.
Benefits of investing in foreclosures can include buying a property below market value and achieving a higher rate of return than other investments. Those losing their property through foreclosure may experience a lower credit rating, but they may be able to avoid bankruptcy and retain control and ownership of other assets.
Foreclosures can be a difficult and frightening process. However there are many agencies that can work with you to refinance your home or assist in selling the home for a reasonable profit. Foreclosing may not be the only option available and these organizations will assist in navigating the process by which you may determine the best course of action concerning the property.