Phil WestBy Phil West, WCI Contributor

The first thing to know about investing in real estate is that it’s a fairly risky way to invest. However, if a house’s value appreciates at a faster rate than inflation and you can sell it once it’s appreciated, you generally can make more money than you could by investing in a more slow-and-steady option like a savings account. 

Investing in real estate can also generate income in the form of rent. While you’re responsible for maintenance and repairs if you become the landlord of a property being rented, you also have the opportunity to make some money in the short term before selling it for a profit. 

Among the various types of properties you might consider when evaluating real estate is a foreclosed home. But as we’ll explore here, once you’ve evaluated the pros and cons, you also might consider not buying a foreclosed home and going another route. 

 

What Is a Foreclosed Home?

Simply put, foreclosure is when a lender tries to recover what’s owed on a defaulted loan. A foreclosed home typically involves someone defaulting on a home loan by missing payments, but there may be other causes leading the home to revert to the lender’s control.

About half of the states in the US require a judge’s action for foreclosure to take effect, though. For a slight majority, a “power of sale” clause written into the mortgage agreement is enough to revert ownership of the property to the lender should the borrower default on the loan. 

More information here:

The Truth About Buying a Foreclosed Home and 10 Other Ways to Provoke a Migraine

 

How to Find Foreclosed Homes? 

buying a foreclosed home

Several different resources exist to locate foreclosed homes. Those include some real estate websites like Redfin and Realtor.com, the site for Fannie Mae’s HomePath program, and some bank websites. You can also look for sheriff’s sale auctions maintained by a government entity, typically on the county level, or via auction.com

 

Advantages of Buying Foreclosed Homes

Foreclosed homes can sometimes be less expensive than other homes on the market—and certainly less than comparable homes in a particular neighborhood. As Investopedia points out, “Most foreclosures are sold at a sizable discount from market value, with the exact amount varying from region to region. The seller may offer additional incentives such as a reduced down payment, lower interest rate, or the elimination of appraisal fees and some closing costs.” 

A house still in the pre-foreclosure or short-sale phase is being sold by a very motivated seller—one who wants to get what they can from a property before losing it and adding a foreclosure to their financial record. 

A buyer can potentially see a significant return on investment if they can get a house at a good value that has a lot of potential and upsides. You'll just likely need to have additional money to invest in improvements. Obviously, you want knowledge beyond watching a few home-flipping shows on HGTV before going this route, but this could potentially bring immediate revenue if it’s a good market and you’re looking to get in and out of a real estate investment relatively quickly. Know that if you’re doing this, though, “relatively quickly” can be, well, relative.

 

Disadvantages of Buying Foreclosed Homes

Foreclosed homes are typically sold “as-is.” You might think this is an opportunity to remake it as you want. But this can include issues that have the potential to surprise you or to make the investment less worth than the initial price if there are costly repairs. 

You also might be taking on some unexpected risks in buying a foreclosed home. Some might be the subject of claims or liens that complicate your situation as the new property owner. It’s definitely worth getting title insurance if you’re buying a foreclosed home in case there’s an issue . . . an issue you wouldn’t expect going through a traditional realtor and bank loan process. It might even be such a complicated foreclosure that the property’s going through an occupancy dispute as you’re trying to buy it—or even once you’ve bought it. 

More information here:

How to Buy a House the Right Way

 

Who Should Consider Investing in Foreclosed Homes? 

If you’re risk-averse, a foreclosed home might not be the right move for you. All real estate purchases come with a good deal of risk, and while it is likely to increase in value over time, that’s not entirely guaranteed. A foreclosed home can certainly be worth the investment, but it comes with an additional layer of question marks that other real estate properties may not have. 

The White Coat Investor is filled with posts like this, whether it’s increasing your financial literacy, showing you the best strategies on your path to financial success, or discussing the topic of mental wellness. To discover just how much The White Coat Investor can help you in your financial journey, start here to read some of our most popular posts and to see everything else WCI has to offer. And if you're inspired to build a sturdy financial foundation, make sure to sign up for our WCI 101 email series.