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Are Foreclosed Homes a Good Option for Rental Properties?

White Dallas House with Foreclosure Sign in Yard

One of the biggest hurdles for new rental real estate investors that are on the market to buy their first rental property is the cost. Yet although high property prices can be an obstacle for some, for other investors, the solution is to look for reduced-price residential properties. Many properties that sell below market value are foreclosed homes. And, those discount prices may seem like a bargain. But before you purchase one, it’s important that you totally evaluate both the pros and cons of getting a foreclosed home that will be used as Dallas rental property.

Pro: Lower Prices

The first and most obvious benefit of buying a foreclosed property that will be used as a rental is the price. Foreclosures are typically priced below market rates since banks that hold them don’t want to own real estate – they want their money. This is why banks are motivated to sell. Obviously, it’s also important to understand why foreclosures are regularly sold at a reduced price. The most common reason is that the properties aren’t always in good condition. But if you have the skills or budget to do a little fixing up, a foreclosed home may be right for you.

Pro: Higher ROI

The lower cost of foreclosed homes can lead to a second important benefit: a high return on your investment. When you purchase a property below market value, you will have a good amount of available equity in the property. As homes in your area increase in value, your property will appreciate, and your equity will grow. Any repairs or improvements you make to the property will only accelerate this process. A good cash flow property is ideal, but real estate investors’ real wealth comes from owning properties with an expected resale value far above the original purchase price.

Pro: Flexible Financing

Sometimes, the banks holding foreclosed properties are willing to unload them to buyers. Depending on the bank, they may be prepared to offer lower interest rates, closing costs, or other financing incentives to a solid buyer. Of course, this isn’t always the case, and some foreclosed properties are sold on a cash-only basis. For this reason, gather as much information as likely about a property before making an offer.

Con: Expensive Repairs

Along with the benefits, there are also several drawbacks to foreclosures to know about. Foreclosures are often called distressed properties, not just because the previous owners stopped paying the mortgage. They often stop doing repairs and maintenance on the home, too. For this reason, foreclosed homes are often located in difficult conditions when they are finally repossessed and sold by the bank. Most of the time, the homeowners even damage or vandalize the property before leaving, requiring vast and expensive repairs. Before purchasing a foreclosure, Dallas property managers need to know what they are getting themselves into and have enough money reserved to cover the cost of getting the property ready to rent.

Con: Slow Closing

The foreclosure process can leave a property in a real tangle of legal and financial difficulties. From liens to title issues and beyond, there are numerous reasons why buying a foreclosed property from a bank often takes longer than a regular sale. For this reason, investors who want to purchase a foreclosed property should be prepared for a lengthy process and many hurdles that will need to be overcome.

Con: Lots of Competition

One more important drawback of purchasing a foreclosed property is the amount of competition. Like you, many investors are looking for that next bargain property. It is not uncommon for there to be a lot of competition for the same property. If the competition becomes especially intense, it could delay the purchase process or even drive the property’s price up and out of an affordable price range. You may also need to offer a higher down payment or other incentives to catch the bank’s eye, which means you’ll need a lot of cash. If you are investing in your first rental property or have difficulty getting good financing, a foreclosed property may not be your best choice.

 

So is a foreclosed property a good option for your next Dallas rental? The answer depends on your circumstances. For some investors, a foreclosure could offer a bargain property that will make a great rental. But for others, the difficulties of buying a foreclosure make it a less desirable path to investing. Would you like to know more about ways to locate and purchase rental properties below the market rate? Contact us online or give us a call at 817-502-3588.

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