For investors, foreclosed properties can be a golden opportunity to get a property at a great price. However, it’s important to remember that, with foreclosures, the previous owner had issues with maintaining their mortgage payments—and possibly the property itself. Often, foreclosures need a lot of work to restore them to a condition where you can occupy or rent out the space.
To ensure you’re fully prepared for what a foreclosure sale might entail, we asked a panel of Forbes Real Estate Council members what a prospective buyer should consider before investing in a foreclosed property. Here’s what they had to say.
Members discuss a few things to watch for when considering a foreclosed property.
Photos courtesy of the individual members.
1. Consider Potential Repair Costs In Your Budget
Typically foreclosure properties are sold “as is.” Try to mitigate this risk by only bidding up to a purchase price that allows you a healthy budget to address any issues. Also, use your team of professionals to analyze the property. Your lawyer and trusted inspector are especially critical. – Deborah Rabbino Bhatt, Vesta New York
2. If Renting, Be Prepared To Carry The Mortgage Until You Find Tenants
Foreclosure homes are typically sold in an as-is condition, so taking on the repairs can be a gamble. Buying any property without existing tenants means it could sit empty for a few months while you search for the right tenant. Make sure you are prepared to carry the mortgage and cover the renovation costs for the interim. – Beatrice de Jong, Open Listings (YC W15)
3. Be Prepared For A Gut Renovation Job
When buying a foreclosure property is crucial to remember that you may not have a chance of inspecting the interior of the property. With that in mind, consider the fact that the property may be run down and may need a gut renovation job. Consider that cost when deciding on the max bid you’re willing to submit. – Evi Kokalari-Angelakis, Golden Key Realty Group
4. You’re Only Guaranteed To Get The Building
The key thing to remember here is you will get the land or the building when you buy a foreclosure—you just might not get everything inside. Have you ever heard the expression, “they took everything but the kitchen sink?” Well, in foreclosures, they can take the kitchen sink, the quartz countertops, the beautiful new appliances and so on. This happened to my own sweet mom, so buyers beware. – Chris Ryan, Beyond Properties Group (eXp Realty)
5. Bring In The Pros To Help You Analyze The Property
Invest in your due diligence process. Spend the time to get quotes or hire experts to conduct an analysis in order to get a thorough understanding of costs and time for major repairs and mitigating deferred maintenance issues. As investors, we have done well acquiring and increasing the value of foreclosed properties because we’ve done our due diligence and set aside sufficient working capital. – Catherine Kuo, Elite Homes | Christie’s International Real Estate
6. Give Yourself An Allowance For Deferred Maintenance Costs
Early in this cycle, we acquired several hundred foreclosed single-family homes: short sales, courthouse steps, foreclosure realtors. We found that the biggest challenge was to understand the true costs necessary to stabilize each property. We spent time estimating and computing the costs necessary for repairs and maintenance to which we would add a 30% allowance for items that were not visible. – Ben Colonomos, PointOne Holdings LLC
7. Assume The Worst
Assume a worst case interior condition since you probably can’t get inside. You will always be surprised to the upside! If you plan to hold the asset for rental, you probably have a minimum renovation budget in mind that is somewhat independent of the condition. If you renovate to a higher standard, you save money and time where it counts in the retail business—on the turn between clients. – Beth O’Brien, CoreVest Finance
8. Liens And Judgments Might Crush A Deal
Encumbrances can ruin the even best investment property deal. If buying REOs, it’s not as big a concern. Bank-owned properties typically have junior liens extinguished. However, IRS liens may still be valid. When buying pre-foreclosure, a thorough discovery of the owner’s record of judgments is a must. I’ve negotiated non-government liens and judgments enough to bring deals back to life. – Ross Hamilton, Connected Investors
9. Choose A Portfolio Strategy To Spread Out Risks
Buy at a large enough discount to fair market value to compensate for the risk of buying a distressed property and employ a portfolio strategy to spread the risk across multiple properties. Any single foreclosed home has a variety of risks, so a portfolio approach aims to profit enough from the winners to offset unexpected issues uncovered in other homes that end up having challenges. – Gary Beasley, Roofstock
10. You Might Have To Pay Back Taxes On The Property
Sometimes a foreclosure may have been sitting vacant for a long time will need plumbing and electrical work, which can be expensive. Also, are the property taxes up to date? In some cases, as a buyer, you may have to pay back taxes. A foreclosure property’s price may be deceiving as there are could be many extra costs that no longer make the property worth the price tag. – Joshua Lybolt, Lifstyl Real Estate
11. Inspect And Insure The Property
The three main differences with foreclosure properties can be the condition, title issues and ability to finance them. Always have an inspection if possible. Always get title insurance. Watch out for the seller pushing costs that they would normally cover onto you as the buyer, like property taxes, liens and closing costs. – Kent Clothier, Real Estate Worldwide