Why buying an ugly foreclosure makes sense.
There are few people who have not heard of the foreclosure market in house-buying. Legend tells of fantastical deals being uncovered where houses needing only a coat of paint have been bought directly from lenders for a few dollars and are then resold a matter of weeks later for $100,000. This may or may not be the truth but the reality of the foreclosure market today means that profit margins of this magnitude are unlikely to be found.
Foreclosures – hard work pays off
Buying foreclosed properties is about as far from shopping at a real-estate agent as you can get. There are no attractive external and internal photographs to help you imagine your new lifestyle and the data about room sizes and facilities will be sparse. There is a great deal of background research to do by yourself and you need to train your eye to understand the physical problems that may need to be rectified in a “distressed” property.
“Distressed” property
“Distressed” is a term used in the market to describe a property that has been neglected, where basic maintenance has been overlooked sometimes causing serious deterioration to the structure of the house. Home-owners who are defaulting on their mortgage are often severely pre-occupied with their situation. They are focusing on surviving and home maintenance is a very low priority for them. In addition, the prospect of being evicted from your home at some time in the future makes you reluctant to invest time or money in an asset that may cease to be yours next week, next month or next year.
Some foreclosed homes will require very little work to bring them back to their true market value. The lenders who have taken over the title to these properties are well aware of this and they are unlikely to discount the selling price much below market valuation. It is in their interests to sell the houses for as much as they can get in order to offset their costs and expenses.
Pretty does not spell profit
The real money is to be made in foreclosure properties that are the ugly ducklings. Outwardly they will be totally unappealing to the paint and filler renovators. They will see too much dilapidation to tackle and may lack the imagination to see beyond the damaged roof, broken guttering, the smashed windows and the graffiti scrawled across the walls. However an educated eye can understand that repair and remodeling need not be expensive and the sidewalk appeal can be improved immeasurably in a reasonably short period of time.
Even in the foreclosure market where bidding on a property should be a measured and unemotional activity, you will find far too much romanticism and competition for the pretty properties that are actually a poor investment. They might be turned round quickly but they are unlikely to make a substantial return for time and effort. The badly proportioned, poorly situated and downright hideous houses often go unsold at auction.
Where the best deals are made
This is the prudent investor’s opportunity to approach the lender directly after the auction and make an offer close to the original owner’s equity value. If you have researched the property thoroughly, you’ll know pretty much what the lender is expecting to recoup from the sale of the house. Lenders do not want to hang on to underperforming assets for any longer than they have to and they might even help you with financing at preferential rates just to get the ugly duckling off their books.