We’ve all heard the horror stories. You tell people you plan to buy an occupied foreclosure or bank-owned home and the warnings start to drop faster than a downpour during a hurricane.
One friend might tell you about tenants that smashed every window in his house, while another might recount the time when she had tenants running a drug lab on her property.
While these stories may sound frightening, they shouldn’t scare you away. You can often buy foreclosure or bank-owned properties for much less than they are worth and with a little work, you can earn a nice return on your investment or build equity for the future.
Here are six tips for minimizing the risk involved with buying an occupied property.
1. Know your budget
Start with a budget and divide it into these segments: cost of the property, cost of the repairs, buying and selling or holding costs and a cushion. The cushion is important because your rehab costs may be higher than you expected or you may have to sell the house quickly or rent it for less than you planned.1
2. Determine the property’s value
Make sure you know how much the property is worth now and future price trends, especially if you plan to hold and rent the home. You can do this by researching comparable sales online in the same neighborhood, attending nearby open houses and by contacting Realtors and having them assist you.
3. Investigate the neighborhood
The neighborhood is just as important as the property itself, especially if you plan to buy and keep the home. Check to see if nearby homes are well maintained. Too many abandoned or neglected homes could negatively affect the value of your property. Also find out if the home is located in a good school district and whether it’s close to employment, shopping and entertainment. Typically, if a neighborhood is well kept, it will also have many of the other positive factors.
4. Estimate repairs
Once you are confident in the neighborhood, the next step would be to estimate the rehab costs. This can be tricky without access to the inside of the property, but it can be done. Unless you are a general contractor, you should hire one to help you estimate the costs of painting, replacing the flooring and any other plumbing, electrical or miscellaneous repairs.
This is where your financial cushion is so important, as there may be more repairs than you anticipate. But if the home is occupied and well-maintained on the outside, it’s probably safe to assume that the major systems – such as the plumbing and electrical – are working.
5. Purchase title report
Another very important precautionary step is the title report. You need to know about any liens on the property ahead of time. For instance, did the previous owners pay their taxes? If the property is located in a homeowner’s association, are the dues current?
Knowing about liens is important because if you purchase the property, you will be responsible for paying for them. Many investors don’t want to spend a few hundred dollars on a full title report, but without it, you may end up spending a few thousand dollars to clear unpaid liens.
6. Develop a strategy for vacating the property
If the property is occupied by tenants and you want to be a landlord, then you’re in luck. You just have the tenants sign a new lease, although it may be wise to hire a real estate agent to help with the leasing materials.
If, however, you want to flip the home or it’s occupied by the former owners who refuse to sign a lease, then you may need to hire a real estate attorney. Sometimes, the strategy may be as simple as offering the occupants money to leave. Other times, though, you may need to evict them. If that’s the case, it would be smart to hire an experienced attorney to guide you through the eviction process.
With the right amount of preparation and knowledge, buying an occupied foreclosure or bank-owned property can be an effective way to invest in real estate and build wealth for the future.
Auction.com has over 30,000 listings of foreclosure and bank-owned properties. Many of these properties have title data, property reports, photos and bidding information, so much of the work is done for you. Why not take a look? Browse properties today.
Disclaimer: The information in this article is not meant to be interpreted as legal or investment advice. Please check with an attorney or and/or real estate professional to get advice pertaining to your individual situation.
Footnotes:
1 The nest. https://budgeting.thenest.com/budget-flipping-home-28296.html
