Potential Pitfalls Of Buying A Foreclosure (And How to Avoid Them)
by Alex Lewis
on Friday, March 23rd, 2018 at 5:19pm.
“A dollar saved is a dollar earned,” wrote Benjamin Franklin. On the surface, Franklin’s famous adage offers simple advice: frugality is a form of financial investment.
But go just a little deeper, and the saying encourages us to discern between good discounts and misleading ones. Whatever the venture, an investor owes it to him or herself to take all risks into honest consideration before putting any money on the table.
Real estate is one of the most common forms of investment. It can be done through several methods, including buy-and-hold, property leasing, and house-flipping, among others. In recent years, shows like Fixer Upper on HGTV have popularized house flipping. This method involves purchasing a (low-cost) foreclosed property, performing all necessary remodeling and repair, and then reselling that previously-dilapidated property for a profit.
The process is easier said than done--and certainly easier to watch from a living room couch than to do yourself. No matter how quickly and easily it can be done on tv, the reality is that house flipping and foreclosure buying are real estate investments that come with some of the greatest financial risks and personal hurdles.
If it’s so risky, why do people buy foreclosures?
Families buy foreclosures to save money. After all, reports like this one from NBC News say that foreclosures are on average 28% cheaper than other houses. That’s more than a quarter of the home’s cost!
To put that percentage in perspective, Zillow says that the current median U.S. home value is $210,200. That means the average foreclosed home could realistically save the buyer over $58,000 at the time of purchase.
That’s a lofty incentive.
However, in an effort to earn a side income, many families purchase foreclosures only to end up losing money because of unrealistic repair and remodel cost expectations they have at the onset of the project. In addition, the mental and physical stress of house flipping can place a heavy burden on people already working full-time jobs and trying to raise a family.
In other words, a dollar saved by purchasing a foreclosure doesn’t always equate to a dollar earned after that foreclosed home is remodeled and resold.
There are several key pitfalls people run into when buying foreclosures. Yet, when they are done right, they can offer more than just a financial return: a great learning experience, great life accomplishments, and the satisfaction of watching a house be completely transformed. Here’s how you can get started on the right foot:
Pay for a top-tier home inspection
A top of the line Texas home inspection isn’t as expensive as it sounds. For just a few hundred dollars, a home inspector can evaluate a home, searching for the details that most homebuyers might miss.
When it comes to foreclosures, anyone can easily notice cosmetic damage like punctured walls and graffiti. But evidence of termites, bad HVAC, roof damage, or faulty plumbing and wiring might be harder for most of us to notice, yet these damages can be some of the most costly to restore or replace.
Hire a reliable, well-reviewed home inspector before you contractually lock yourself into the purchase of a foreclosed property. The choice can save you from wasting thousands of dollars (and enduring headache after problem-inducing headache).
Become a foreclosure expert before you buy a home
The internet offers a lot of free informational resources in the form of e-books, blogs, white papers, and more. Anyone willing to invest the time to learn a particular skill may gain almost as much as he or she wants to know about that subject, assuming they find the right resources and spend their time in a productive manner.
With abundant information inevitably comes the opportunity for shallow or even misinformation. Use research best practices to sift the reliable foreclosure buying methods from the salesy, hype-oriented blogs. There’s plenty of quality educational material online; it’s your responsibility to locate the most trustworthy information and apply what you learn.
Don’t limit yourself to web resources. Buy a book or two! Even just by mere capacity, a 70,000 word book will always contain more information than a 1,500 word blog post. To practice proper due-diligence for real estate learning, use internet resources to find and vet the most practical books about house flipping. Buy those books.
As you read, be a generous annotator. No one remembers as much as they expect.
Make technology work for you
Abundant information goes hand in hand with prolific innovation. The real estate industry has gained many useful apps and online resources that can make the lives of homebuyers and sellers much easier. Learn what’s available and put whatever is most practical to use!
If you expect to perform a lot of repairs on your own, there’s the Handyman DIY app for renovation how-to’s and tips.
And there are foreclosure-oriented listing services like the Foreclosed Homes app.
These are just a few examples. Software businesses exist in all shapes and sizes, with various degrees of user-friendliness and practicality. Test some of the apps and online resources to see what is most helpful for you.
Develop an investment strategy
Technology has streamlined many of the real estate investment processes. But technology can’t take the place of good investment strategy. At the end of the day, knowing how to accurately predict expenses, grasping the potential workload of home repairs, and knowing the bandwidth of your personal schedule can provide greater potential for success than the most creative real estate software on the market.
It helps to look at your investment through the lens of a business owner. You must ask, what are the financial and time decisions I can make to garner the greatest reward for the lowest cost?
Look honestly at your calendar. Do you work full-time? Part-time? From purely an economics perspective, remember that every hour you can’t personally allocate to the project, you must expect to pay more for another person to perform that same task.
Give yourself a realistic deadline. This helps you refrain from procrastinating, and makes sure that you prioritize expensive or larger projects early into the house flipping venture.