Buying a Foreclosure as an Investment Property
Jul 26
Diahann Lassus wasn’t interested in becoming a landlord. As a certified financial planner by trade, she has watched the housing market fall and fall and fall some more. She heard stories of short sales and foreclosure deals but never put herself into the mix.
That is until earlier this year, when Lassus spotted a foreclosure sale sign on the lawn of a three-bedroom ranch home in the Bonita Springs, Fla., development where she already owns a house. She saw an opportunity.
Lassus, who also is a certified public accountant, is more financially savvy than the typical home buyer. But before she bid on a distressed property, she knew she needed to learn more about the current market.
“I’ve really never had the desire to get involved in buying investment properties before,” says Lassus, who splits her time between Florida and New Jersey. “I did a very extensive analysis prior to making my first offer.”
If you’re thinking of buying a home, Lassus’ recent experience offers a helpful case study of how to navigate the foreclosure market.
Here’s what you need to know.
Investigate Your Own Finances
About 4.5 percent of all homes were in foreclosure nationwide at the end of March, according to the Mortgage Bankers Association. Florida, Nevada and New Jersey topped the list with the highest foreclosure rates. Of course, that news isn’t good for the economy, but if you’re in a solid financial position, buying a home or a second home as an investment property could be good for your portfolio — if you buy smart.
Simply put, it’s a numbers game. Before you start looking at properties, make sure you can afford a home and contact a lender to get pre-qualified for a mortgage.
“Banks are looking for a fast close in the foreclosure market,” Lassus says. “If you are ready to go with a mortgage, you are in a much better position to negotiate.”
Be prepared to shop around for a loan. Some lenders are very cautious about financing a home in a foreclosure-laden area, and others won’t finance investment properties in certain locales. If you’re able to pay cash, you’re in a stronger position during negotiations, Lassus says.
Your cash is important for more than the purchase price, especially if you’re buying an investment property. You’ll need extra money for repairs, maintenance and to cover monthly bills if you’re unable to find a renter.
“Anyone buying property today needs to make sure they have the cash reserve to carry the property for a long time,” Lassus says.
If you normally maintain three to six months’ of living expenses in an emergency fund, you’ll need even more available if you’re carrying an additional property. (As you build your emergency reserves, consider these smart places to park your cash.)
