Back when I was a rookie investor chomping at the bit to grow my real estate portfolio, I spent a lot of time and energy chasing leads on cheap properties in our Windy City. I bought lead lists to find motivated sellers. I searched for properties in the Cook County Land Bank. And then, I put my energy into foreclosures. When I finally found an REO that fit my criteria, I submitted what I thought was a competitive offer. After several frustrating weeks of silence, the bank ultimately rejected all offers and placed the home up for auction. The bidders raised the price to near market value.
My goal had simply been to buy a foreclosed home in Chicago, rehab it, and then sell the property for a reasonable return. I believed it was a safe bet for building equity and growing my real estate investment business. After all, Chicago still had a foreclosure rate that was higher than most other regions of the country, even in the face of steady economic growth. But it wasn’t only the economy that was growing; the competition was growing too. So I started to wonder if it’s worthwhile to buy a foreclosed home at all.
PROS AND CONS OF BUYING A FORECLOSED HOUSE IN CHICAGO
Foreclosures in today’s market still have the same benefits and drawbacks. Recent reports show that foreclosure proceedings are continuing to happen at a good clip, but inventory is slowly decreasing. That’s because banks are still not letting them go quite yet. This shadow foreclosure inventory makes buying foreclosed properties in Chicago seem especially attractive, but the slow release rate increases the competition amongst real estate investors.
It’s no wonder that investors often focus on acquiring a foreclosed home—the advantage is certainly quite appealing. Typical buyers are not usually interested and traditional financing is not always available. So, these properties are often offered at a discount with investors positioned to purchase them cheaply. And, it can seem like there’s always a steady supply here in Chicagoland.
The disadvantages of buying a foreclosed home, by contrast, are worth considering. Let me share a few:
Homeowners who cannot afford mortgage payments generally cannot afford the property upkeep either. When forced to leave their homes through foreclosure, homeowners often take appliances and fixtures—anything of value—and leave behind only garbage and debris. And, though foreclosure activity is down overall since this time last year in the Chicago area, it takes longer than ever for homes to be absorbed into a bank’s inventory. In fact, the average time for the foreclosure process, according to ATTOM Data Solutions, is almost 800 days. If a home is left vacant for this long due to the extended time horizon to acquire and offload it, it may fall further into disrepair through neglect or vandalism. Some properties could even be occupied by squatters. Though these issues facilitate the potential discounts associated with REOs, remediating the condition of the home is rarely for the faint of heart.
COST TO REPAIR
Acquiring a foreclosed property can seem like a good deal, particularly when purchased at a price that’s below market value. However, the numbers for bringing that house back to market value can really add up—especially if you buy from a local auction, like the Cook County Judicial Sales Corporation. You may inherit an in-process eviction, as well as any liens against the property that the bank has not resolved or disclosed. In addition, you may rack up other legal fees and, of course, the extensive repair costs often associated with a foreclosed home. Also, with auctions, there’s a lot of fine print that you’ll want to be aware of since they can raise your risk and your expenses. For example, you’re rarely, if ever, allowed to perform a home inspection before you buy. Once the financial dust settles, the total cost of the investment may actually surpass the After Repair Value (ARV) if you are not careful.
TIME TO CLOSE
The patience and paperwork required to deal with purchasing a property from a lender, whether through an agent or auction, can create time constraints. The closing process for a listed REO can consume 45 days or more because of the back and forth of paperwork. Auctions, like the Cook County Sheriff’s Sale, pose even more difficulty, though they may seem expedient at the outset because of the cash on-the-spot payment requirements. Again, you probably won’t have a chance to inspect the house prior to buying, so it’s easy to purchase a time-consuming and costly mistake that undermines potential profits. But, because court approval is required and takes several months in Cook County, you won’t know just how much time or money you’ll need to get your property back on the market for a potentially long time.
Buying a distressed home in pre-foreclosure, in my experience, is time better spent. It still yields the benefit associated with buying an REO—the opportunity to purchase a discounted property—but with potentially less risk and hassle. The house tends to be in better shape, making renovations more reasonable, and you will have time to work in a home inspection before you buy so that you know what you’re getting into.
BUYING DISTRESSED PROPERTIES BEFORE FORECLOSURE
You can avoid the difficulties of dealing with foreclosures by connecting with a distressed homeowner directly—before any bank-related proceedings have begun. A homeowner may already be thinking of selling if he or she has fallen behind on mortgage payments, and especially so if the lender has issued a Notice of Default. If the bank has initiated the foreclosure process, the owners may be that much more eager to sell in order to halt the process.
But a familiar problem arises for investors. The time it takes to find leads and marketing to potential home sellers may not result in a solid investment opportunity. I sought an option that would require fewer resources to locate good deals, so I could spend a lot more time investing in them. This inspired me to become a HomeVestors® franchisee, as I acquired an independently owned and operated franchise. HomeVestors®’ marketing and lead generation tools, based on the widely-known “We Buy Ugly Houses®” national brand, gives me access to financially-distressed Chicago homeowners before their properties are vacated or fall into disrepair. With HomeVestors®’ proprietary ValueChek™ system, I can avoid overpaying for properties because it helps me calculate repair costs accurately. This increases my odds of seeing reasonable returns. If you’re ready to get started, perhaps it’s time to contact HomeVestors® today.
Each franchise office is independently owned and operated.