A Few Simple Tips on Buying Foreclosed Homes as Rental Homes
The news is filled with stories of the foreclosure crisis in America. When the real estate bubble burst, too many homes lost too much value, leaving too many people unable (or unwilling) to continue paying their mortgages.
If you’re thinking of buying a foreclosed home with the intention of renting it, there are risks and rewards—just like with any other transaction. Here are a few things to consider about buying foreclosed homes as rental properties:
Dos and don’ts for dealing with a bank: Purchasing a foreclosed property is different than buying a home from an individual directly or through a real estate broker. You might be dealing with the bank, or the mortgage holder’s representatives or legal team. Expect the process to take longer than you think. Don’t expect to deal with one person throughout the process (although you might, if you’re lucky). And do keep meticulous records of each communication.
Try to buy when the property is in preforeclosure: Preforeclosure is the time after the homeowner receives a default notice but before the auction occurs. You might be able to work with the homeowner, instead of the mortgage holder. This is usually a quicker process, since the homeowner will be anxious to complete the transaction.
Scrutinize the neighborhood: if the home you’re buying is in an area full of foreclosed homes, its value may take a long time to appreciate. And, you’ll have plenty of competition for fewer potential tenants.
Why?
- Tenants might not be as interested in renting in an empty neighborhood.
- Some of those who would normally rent will instead be purchasing foreclosed properties to live in.
- If other rental property owners are purchasing foreclosed homes in the same neighborhood, you’ll be competing with them for tenants as well.
Find out whether the home was a rental or owner-occupied: 40% of foreclosures were purchased as investment properties. Find out if yours is one of them, and if you’ll be inheriting tenants. Ask how they cared for the property, and if they paid the rent on time. If the home was owner-occupied, make sure the fixtures are still in place (disgruntled people often strip the home prior to moving) and that there are no squatters to deal with (an increasingly common problem). If the place is trashed, you’ll spend a lot of your profit making it habitable before you even get to rent it.
A realistic view of a foreclosed property can help you determine whether or not to purchase it, and whether or not you’ll have a successful experience. Not all bargains turn out to be good rental property investments!