For many people, investing in a rental property will be one of the most significant and stressful purchasing decisions they make. Finding an ideal property on the market, in the right neighborhood, with enough amenities to appeal to prospective tenants, and of course, funding the down payment, just scratches the surface of what goes into investing in rental homes.
But what if I told you there was a way to ease some of your down payment funding stress by reducing the cost of home buying?
Today we will look at some of the often-overlooked benefits of investing in a foreclosure. So, the next time you are in the market to purchase a rental property, you might consider investing in a foreclosed home.
Contents of This Article:
- Should You Invest in a Foreclosure?
- What Is a Foreclosure?
- Benefits of Investing in a Foreclosure
- Choose BMG to Manage Your Investment
Should You Invest in a Foreclosure?
The word “foreclosure” frequently conjures up negative feelings, especially for those looking to purchase a home. Horror stories of ripped-out plumbing and filthy interiors scare even the most frugal home buyers from considering a foreclosed home investment.
However, the truth is, investing in a foreclosure offers some wonderful and unique buying opportunities. Moreover, if you take the proper precautions, you can actually grab a deal on your next investment property and be well on your way to a positive cash flow via your foreclosure investment.
Once your Philadelphia property manager places a highly qualified tenant in the residence, the money investment will really start paying off.
What Is a Foreclosure?
A foreclosure is a legal process in which the lender (typically a bank) attempts to retrieve the balance of a loan they had previously issued to a homeowner who is no longer making payments on their mortgage. In a foreclosure, the lender can also claim possession of the property since the homeowner, or borrower, is no longer fulfilling their financial obligations.
There are many reasons a homeowner goes into foreclosure on their property:
- Unexpected job loss
- Inability to work due to medical condition
- Excessive debt and mounting bills
- Divorce or other family problems
- Unexpected large expenses
- Job transfers
- Market crashes in which the property’s value plummets far below what is owed (also known as an “underwater mortgage”)
During a foreclosure, the lender has several options to resolve the issue of non-payment:
- Revise the payment schedule to make the house more affordable to the homeowner
- Put the home up for public auction
- Take legal ownership of the home in hopes of selling it privately
In the end, foreclosure is a complicated process that seeks to protect lenders and homeowners.
The foreclosure process usually occurs in many distinct stages depending on how the loan was initially structured and individual circumstances. In fact, most foreclosures take months to resolve fully and largely depend on how the borrower decides to react to the initiation of foreclosure proceedings.
Benefits of Investing in a Foreclosure
Despite the problems some foreclosures create when it comes to purchasing one to add to your rental property portfolio, there are plenty of benefits that you can capitalize on if you do your due diligence before buying.
- Discounted Price
- Increased Bargaining Power
- Quick Buying Process
- Lower Down Payment
- Value Building
Discounted Price
Many times a foreclosure’s sale price will be marked down significantly from other properties in the same neighborhood.
And, since foreclosures are not limited to poor neighborhoods with no nearby amenities, chances are you can find a great rental property with great appeal to potential tenants. You just have to do a little research and due diligence.
In the end, opening up your eyes to foreclosures makes properties that might otherwise be unavailable to you now available–at a considerable discount.
Increased Bargaining Power
In addition to coming in at much lower prices than value market prices, homes that have been in foreclosure for a long time are sometimes easier to grab at even lower prices with a little bit of bargaining.
Foreclosure homes hurt lenders. After all, they are not receiving any of the money they agreed to loan to the borrower during a foreclosure, and as a result, the lenders suffer financially. Lenders want to get rid of foreclosed homes quickly so that they can begin receiving money again.
Using this knowledge to your advantage, you may be able to provide a seriously low offer to a lender. You never know—they might consider your “lowball offer” just to get rid of a property that has been sitting on the market for a long time.
Quick Buying Process
Lenders are looking to sell foreclosures as quickly as possible to recoup as much lost profit as possible. So this means closing deals tend to happen quickly.
Acting as the seller, the lender will have no reason to back out last minute, making you a proud property owner once the papers are processed. Then you can hire your trusted Philadelphia property management company and place a tenant in the property as soon as possible.
And what does this quick buying process mean for you?
With this faster buying process, monthly rents will start coming in faster than if you purchased a property the traditional way, giving you the financial freedom to potentially invest in additional properties.
Lower Down Payment
Typically, lenders will accept lower down payments from investors on foreclosures. This gives first-time rental property investors a great opportunity to get started in the rental property business with a valuable property without having to come up with such a hefty down payment.
Lenders tend to consider lower down payments when trying to sell off a foreclosed property because investors demand it. Since foreclosed homes usually have lower interest rates, those investing in them also want to have a matching lower down payment requirement.
Value Building
Perhaps you invest in a foreclosure at a significantly lower price than other similar properties in the neighborhood. Then, the values of those homes increase as a whole. In that case, your buyer’s percentage increase can be greater than even your next-door neighbor’s.
In addition, buying a foreclosure “as is” means you have a great opportunity to upgrade and renovate the property as you see fit. These improvements will skyrocket your property’s value and demand higher monthly rent rates.
Lastly, if you decide to sell down the road, your overall profit will likely be much higher than what you originally paid for the property.
Choose BMG to Manage Your Investment
Ultimately, a foreclosed property does not have to be a deal breaker. There are many reasons why investing in a foreclosure will work to your advantage and make you more money in the future. So, if you’re looking to purchase an investment property, consider the foreclosures available in the neighborhoods that interest you.
Do some thorough research, offer a low deal to the lender, and see what happens. And, when you have made the deal of the year on a foreclosed property, contact Bay Management Group right away to begin the process of placing a tenant in your new rental.
Experienced staff knowledgeable in advertising vacancies, screening tenants, drafting airtight lease agreements, and managing your property throughout the lease term is just some of what Bay Management Group can offer you.
Learn more about our comprehensive rental management services throughout Baltimore, Philadelphia, Northern Virginia, and Washington, DC.
A friend of mine was thinking about buying a foreclosure, but I wasn’t really sure how you would do that. I really like that you say that they actually have a lower down payment initially. It would be nice for him to save a little bit and still get the house that he wants.
Hi Shad, Thanks for your comment. We’re so glad you found the article helpful! Best of luck to your friend in his purchasing decision.