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Are Foreclosed Homes a Good Option for Rental Properties?

White Melba House with Foreclosure Sign in Yard

One of the biggest obstacles for new rental real estate investors who want to buy their first rental property is the cost. But while high property prices can be a problem for some, for other investors, the answer is to look for reduced-price residential properties. Many properties that sell below market value are foreclosed homes. And at first glance, those discount prices may seem like a bargain. But before you buy one, it’s important for you to carefully weigh both the pros and cons of buying a foreclosed home to use as a Melba rental property.

Pro: Lower Prices

The first and most noticeable benefit of buying a foreclosed property to operate as a rental is the price. Foreclosures typically are priced below market rates because the banks that hold them don’t want to own real estate – they want their money. This frequently makes the banks motivated to sell. Of course, it’s also crucial 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. However, 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 valuable 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 eager to unload them to buyers. Depending on the bank, they may be willing 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 possible on a property before making an offer.

Con: Expensive Repairs

Along with the benefits, there are also some drawbacks to foreclosures to know about. Foreclosures are often described as distressed properties, not just because the previous owners stopped paying the mortgage. They habitually stop doing repairs and maintenance on the home, too. For this reason, foreclosed homes are often found in rough shape when they are finally repossessed and sold by the bank. Sometimes, the homeowners even damage or vandalize the property before leaving, necessitating extensive and costly repairs. Before you buy a foreclosure, Melba property managers need to know what they are getting themselves into and have enough cash 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 complications. From liens to title issues and beyond, there are numerous reasons why buying a foreclosed property from a bank often takes longer than a standard sale. For this reason, investors who want to purchase a foreclosed property must be prepared for a lengthy process and many hurdles that will need to be overcome.

Con: Lots of Competition

Another significant drawback of getting 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 trouble getting good financing, a foreclosed property may not be your best choice.


So is a foreclosed property a good option for your next Melba 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 208-960-0660.

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