When a person is unable to make the mortgage payments on a home, the lender may decide to foreclose and try to sell the property to make back what is still owed. While it makes sense that the lender would want to sell the home for as much as possible, they are often only concerned with covering the debt. Are there any pitfalls in investing this way?
Profit is Made at the Time You Buy
If there is a lot of equity paid into the property, it may be possible to purchase a house and immediately make a profit. For example, if a house was purchased for $125,000, and the owners kept the property while living there, the bank may foreclose on the house while the principle of the loan is paid down to $80,000. The lender will likely sell the property for only $80,000, but it may still be valued at $125,000, meaning the overall bottom-line increase of the owner’s assets is $45,000.
Foreclosures Can Be Stopped
Any number of actions that a struggling homeowner can take may result in the foreclosure being interrupted. For example, a bankruptcy petition can delay a foreclosure. While an investor isn’t necessarily “out” any investment money, it does mean that there is a risk if the anticipated profit of buying a foreclosed property has already been spent.
Flipping Can Be Costly and Time-Consuming
In the previous example, the home was kept in good condition. Unfortunately, when dealing with cases where homebuyers are unable to pay for their homes, there is a high risk that those individuals will not keep up with general home maintenance either. Pet damage can require flooring and walls to be replaced in their entirety. HVAC units might also be beyond repair. In such cases, roofing updates were not likely performed. If not a lot of equity was paid into the home, repairs could consume any potential profit. If the principle of the previous example home is at $100,000, and these added repairs total $40,000, the total investment cost exceeds the value of the house.
With the proper experience, education, and planning, foreclosures can be a lucrative investment endeavor. By taking the proper precautions and keeping certain realities in check, foreclosures can be guaranteed money for those willing to play the long game.
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