Foreclosure Homes – Smart or Dumb Investing?

Analyzing Regional Real Estate Markets, Mortgage Affordability and HUD Foreclosures

Many real estate investors are enamored by the idea of buying a foreclosure. And understandably so. On the face of it, you are being offering a killer deal in your dream location. For instance, you can buy a 3 bed-4 bath foreclosure on Eisenhower Avenue in Alexandria, Virginia for $475,200. This single family home is a 2,030 square feet property. Just 1.5 miles from this home, a brand new 3 bed-5 bath single family home with roughly the same area is being offered for….$996,885!

And this is just the offer price. Highly motivated sellers might mean that you can probably lower the price at the negotiating table. Many investors get lured in by the idea of making a quick buck. And then often end up losing money. Buying or investing in a foreclosure is a complicated decision that needs a systemic approach. You need to dive deep before making this decision.

Is the housing market in your area on an upswing? How much mortgage can you really afford? Does the foreclosed property required significant repairs? Will you need to take a construction loan in order to finance these repairs? Should you opt for a HUD foreclosure?

These are the questions that you need to ask before making, what will possibly be the most important financial decision of your life.

Carefully analyze your real estate market before investing in a Foreclosure

Overall, economic indicators are positive for folks looking to invest in the real estate market. However there are some states which are clearly outperforming the rest. Let us consider the state of Virginia. Permits issued for the period of February-2018 for new housing units showed a YOY change of 61.27% (the national average is 8.63%). In this same period, housing starts showed a YOY increase of 48.88%. All over United States housing starts declined by 4.04%.

Mortgage delinquencies (90+ days) in Virginia for Q417 were at a respectable 1.11% compared to the national average of 1.72%.  According to Federal Reserve Bank of Richmond, home prices increase in every MSA in Virginia except Danville and Harrisonburg on a YOY basis.

Looking at these economic indicators will help you get a feel of your local real estate market. If the market conditions are good, you stand a good chance of buying a foreclosure, flipping it around and selling it at a profit.

However, without due diligence you might end up paying too high a price for an ill maintained property. And you will have a hard time finding buyers.

Mortgage affordability calculators – Tips for using them the right way

So, now you have determined a suitable city/region for investing your money. What is the next step? That is right – determining mortgage affordability. Be careful not to overstretch yourself. And be mindful of the fact that profiting from foreclosures is the domain of patient, long term investors. So, how can you determine mortgage affordability?

There are various mortgage affordability calculators which help you do so. I have shortlisted 3 mortgage affordability calculators – those on Zillow, Bankrate and Chase. You can choose one a mortgage affordability calculator that matches your need.

The underlying logic of these mortgage affordability calculators is pretty constant. You need to input your income and your household expenses. Once you enter in the interest rate and duration of your home loan (ranging from 10 years to 30 years), you can determine the mortgage that you can comfortably afford. Simple, isn’t it? Not quite.

Which factors can drastically affect the results spit out by a mortgage affordability calculator? That is right – Interest rates and loan duration.

If have an excellent credit history (a credit score of 700 or more), you stand a good chance of getting a good deal from your lender. You can either opt for a fixed rate mortgage or an adjustable rate mortgage. The adjustable rate mortgage, as the name suggest varies with changes in interest rate.

You can, hence, predict your mortgage affordability with a greater level of accuracy for a fixed rate mortgage.

As of March 2018, home loan applications for ARM’s increased to 6.7%. These were at 5% in January. As of May 3, 2018 the 5 year ARM was at 3.69%. And the traditional 30 year fixed rate mortgage touched a steep 4.55%. However, the ARM remains fixed only for a certain duration. So, unless you can manage your finances really well, it is better to go with the conventional fixed rate mortgage.

HUD homes for sale…should you go for it?

One listing site boldly proclaims, “Save 50% on HUD foreclosures”. Or, “HUD homes for sale…Get a deal of a lifetime”. So, should you consider HUD foreclosures? Yes. But there are certain factors that you need to be aware of.

The US Housing and Urban Development forecloses homes that default of FHA mortgages. These are 1 to 4 bedroom houses. If you can put the financing in place, you can get qualified for a HUD foreclosure. However, owner occupants generally receive preference over investors for HUD homes.

Bear in mind that you will need to go through a good real estate broker in order to purchase a HUD foreclosure. The US government does not directly work with individuals. There are a variety of websites which list all HUD homes for sale. Do not forget to ask your real estate broker for comps of similar properties. You do not want to end up overpaying for a HUD foreclosure.

Another con of purchasing a HUD home for sale is that they are sold without any repairs. So, accurately estimate repairs before making an investment decision.

Conclusion

Buying a foreclosure is a complicated, long-drawn process. You need to analyze market conditions, gauge your financial condition and avail expert guidance before venturing into the foreclosure market. Yes, as a buyer you have the advantage of dealing with a highly motivated seller who is eager to get rid of his property at the earliest. This presents the opportunity to bargain really hard and drive down the selling price even further.  However, you MUST accurately factor in all costs to ensure that you do not end up overpaying for the property.

Do you have the financial strength to deal with an all cash buyer? Have you enlisted the help of an able real estate broker who can guide you through the foreclosure process? What are chances of buying a HUD home for sale? Have you ensured that there are no other liens attached to the property? These are the questions that you should ask yourself before venturing into the foreclosure market.