Foreclosed properties are sold below market value, but they are also likely to be less valuable than similar properties that have not been foreclosed on. This is especially true if you purchase a foreclosure property in a high foreclosure area. Just as a frustrated previous owner might do damage to a single foreclosure property before being evicted, a collection of frustrated previous owners might do damage to the neighborhood before saying goodbye.
So, are the steeply discounted prices of a foreclosure property worthwhile, or are they just bait to lure you into a money trap?
Use this list of pros and cons to decide for yourself:
Holding onto a property after foreclosing on it is not advantageous to the bank. Every month that goes by means more cost in taxes and maintenance for them. Banks are generally eager to get these properties off their hands, hence the deep price gouges.
Properties are foreclosed upon because the owner fails to meet their mortgage payments, but don’t make the mistake of thinking that all foreclosure properties are in impoverished areas. Just as often, banks foreclose on owners who bit off more than they could chew with palatial properties.
When you browse the foreclosure market, you can find a much wider variety of properties at your price point than you will on the regular market.
When you buy a foreclosure property, you are almost always paying less than what it’s worth. That means automatic appreciation!
Foreclosure properties often have some damage done to them as well. Repair this damage, and you will again see appreciation that outstrips your investment.
Foreclosures reduce the value of other properties in a neighborhood and, if they sit empty for too long, may draw drug dealers or gangs to the neighborhood. When you purchase a foreclosure and fix it up, you are contributing to neighborhood recovery. And if other nearby foreclosures are being purchased by likeminded individuals, you can find yourself in a close knit, supportive community.
It’s very common for foreclosures to have missing appliances, broken windows, or even holes punched in the drywall to remove copper pipes. You should be prepared to shell out some of the money you saved when you bought your foreclosure to repair damage.
If you are the only one devoted to neighborhood recovery in a high foreclosure area, well, you’ll need to be Superman to make a big impact. High foreclosure areas often suffer from increased crime rate and other social issues that make them stressful for property owners.
Foreclosure properties usually come with complicated backstories. They may have liens from previous owners, or the title might be tied up in a divorce suit. It’s also possible that the bank has not evicted the owners yet, in which case you will have to pay for an eviction service and square your conscience with that decision.
Aside from the automatic appreciation you get from buying below market value and repairing damage, your property will be slow to appreciate if it is in a high foreclosure area and that neighborhood never takes a turn for the better.
Purchasing a foreclosure is a high stakes investment, but the payoff can be big if you find a foreclosure in a forward-moving neighborhood. Remember, foreclosures are sold as is: no disclosures, no inspections, no contingencies. For that reason, it’s crucial that you fully understand the pros and cons of a foreclosure before investing!