Foreclosed properties sound like a great idea. We've all seen those HGTV shows where someone makes a lot of money on one. But there are a lot of risks involved.
What are the risks and dangers of buying a foreclosed property?
A foreclosed home is one that needs a lot of work. The previous tenants were not able to pay their mortgage, so they were probably not doing a good job of maintaining the home. Often, when the bank comes after them, they start to tear the home apart. We've even heard stories of people literally pouring concrete down a toilet just to “get” the bank.
If you're buying a foreclosed home, you're buying it from the bank that used legal action to aggressively take it from the previous owner of the property. There can be a lot of risk.
We've also seen there are many potential issues when it comes to the process of purchasing a foreclosed home.
Why is it more difficult to do that compared to normal circumstances?
Well, if you've ever bought a home before, you know, 95% of home purchases are done with a home that passes inspection. There's a whole industry built to handle those normal homes.
If you're in a foreclosed home, you're outside of that normal swimming lane; you're in a whole different ecosystem. Most banks won't lend in that property because it might not be deemed inhabitable, and if you can't get the lender to lend to you, you only have a few options.
You can buy the property with cash yourself with no mortgage, and most of us can't do that. Or you have to go to a lender who will lend into these uninhabitable homes, and you're going to pay a much higher interest rate, and that interest is going to accrue against you very fast. It's an incredibly competitive environment.
Foreclosures can be great deals, but they also come with a lot of risks, both in the physical structure and the financing of the property.
Now that we've established the risks of buying a foreclosed property, why is it better to invest in say, multifamily or non-foreclosure multifamily?
To answer that, let's go back to the foreclosed home. When you personally live in your investments, that can be very stressful. If you buy a home that makes sense, that you can get financed easily, that you're not trying to do massive repairs on, then you have a safe, nice place to live in.
You take your investment dollars and put them in an asset class that's meant to be invested in, and then take your living dollars and just buy that home. That makes sense.
So, foreclosures can be a great investment for you. But if you're looking for a more stable investment, it's always better to invest in stable multifamily. If you'd like to hear more about how to invest in multifamily real estate, please visit Nighthawk equity.com/call. We'd love to speak with you.