September 22, 2020
Is buying a foreclosed home in your future? As COVID-19 continues to wreak havoc on the economy, we’ll likely see more foreclosures coming onto the market.
It’s not surprising that you might consider buying a foreclosed home for your next project as a fix and flipper. After all, it’s possible to acquire foreclosed homes anywhere from 10%-40% below market value. While this is an appealing concept, you’re probably wondering when and if it’s a good investment, and when is it not?
In this blog, we’ll share traits to look out for in a foreclosure so you can spot red flags in advance and know what is and isn’t a deal-breaker.
6 Tips on Buying a Foreclosed Home for a Fix and Flip
The key to making money in any fix and flip investment is to control your costs and stay on deadline. Here are 6 guidelines to help you do just that if you’re considering buying a foreclosure.
1. Flipping a Foreclosed Home- Is It a Good Idea?
The potential profit you can make on a foreclosure can entice the most experienced fix and flipper. Yet, you probably know it’s essential to have good information before you can make an informed decision.
While many factors go into assessing the potential of a fix and flip property, one that could make it a good buy is the neighborhood. Is it in a desirable location, and what types of properties are selling fast in that area? Don’t forget to check the surrounding neighborhoods too.
You already know location is everything in real estate. If the location is good and everything else checks out, that foreclosure could be a good deal for you.
2. Red Flags Specific to Foreclosed Homes
There are numerous red flags you may find in the foreclosure market:
- Neglect
- Possible liens
- Angry former owners
One of the biggest red flags when it comes to foreclosures is the previous owner. Some are spiteful and will damage the home because they can.
Others have let the property sink into such a state of disrepair that it’s difficult to assess the full picture upon inspection. In some cases, you’ll find light fixtures and faucets missing or even a damaged electrical panel.
You might find added additions that aren’t up to code because the person didn’t get the proper permits, or they started renovations but didn’t finish. This might mean you have to remove unpermitted additions or structures, which can add to your costs.
Additionally, sometimes foreclosed homes have liens on them due to unpaid property taxes or other judgments. You want to ensure the property has a clean title by doing your research.
3. What Should You Look for in a Foreclosed Home?
When a home goes into foreclosure, there’s likely neglect to the upkeep. Sometimes, you’ll inherit years of neglect when you buy a foreclosed home, which can mean potential structural damage, electrical or plumbing issues.
In addition, people may add a porch or other addition without proper permits or have converted a garage into a living space.
You’ll also want to find out if the property taxes are up-to-date and how much they’re likely to go up once you fix the place up.
On the positive side, if you can have it checked out and the property seems structurally sound, and most of the work is cosmetic, it can work. You’ll want to assess the loan terms available specifically for fix and flips.
4. Hire an Inspector
This may be one of the most important parts of a profitable fix and flip. Hiring a qualified inspector can save you tens of thousands of dollars. As you know, there are many details to look for when inspecting the property, and it’s good to have another set of eyes.
5. Do Your Due Diligence
Foreclosures are a special breed within the fix and flip investing world. As a result, you’ll want to be extra diligent when it comes to researching potential liens and anything else that may not be required to disclose. You can request a preliminary title report and review it for any liens or tax liabilities.
Look at the sales activity in the neighborhood.
- How long are homes sitting on the market?
- What are the price trends?
- How many other foreclosures are in the area?
Such considerations can make a huge difference in whether or not the property is a good investment.
6. Stay Within Budget
The whole point of a fix and flip business is to make a profit. Yet, if you run into “surprises” or underestimate the costs at the pre-planning stage, you can easily lose your profit if you’re not careful.
If you follow these guidelines and stay on budget, you can come out ahead. Part of staying on budget is allocating enough money. Try out our hard money loan calculator to gauge your loan needs.
If you’re interested in flipping a foreclosed home, we can help you along the way. From estimating costs to evaluating a property, we partner with experienced fix and flippers. Reach out to us at Bay Mountain Capital for guidance on your next flip.
About Bay Mountain Capital:
Bay Mountain Capital has been in business for more than a decade, closing approximately 2,000 loans. We specialize in financing all types of residential and commercial property investments throughout Texas and Georgia. Using common sense and value-added approach, we strive to incorporate these principles into our underwriting and closing processes.
As a direct lender, Bay Mountain Capital can close a loan within one day after receiving a complete file and clear title. The process generally takes two weeks for a residential loan but can be accelerated where circumstances require it.
We are primarily an asset-based lender, which means that qualification requirements are limited. Our rates and fees are among the lowest in the industry.