Q&A: Does Purchasing Foreclosed Properties Make Financial Sense?

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Foreclosed properties are known to be great investments because of their low prices, but like any business venture, there are factors to consider before they make financial sense

A good deal for almost anyone making a purchase is getting the best possible value at the lowest possible price. It is no different in real estate, as property-hunters look to buy the best properties at prices lower than market value. Unfortunately, land is a finite resource, and increasing population means increasing demand, which means increasing prices. Seldom is the home priced lower than market value, unless of course it is a foreclosed property.

To the uninitiated, foreclosed homes are those repossessed by financial institutions because the prior owners are unable to pay the loan used for its acquisition. The property in turn is put up for purchase at a price lower than its market value as a quick means to liquidate the nonperforming asset.

While the prices are significantly lower than for other properties, there are other considerations to take into account to determine if buying a foreclosed property is indeed a good deal, which will be discussed in this edition of Lamudi Q&A.

Q: Does Purchasing Foreclosed Properties Make Financial Sense?

From a purely buying standpoint, acquiring a foreclosed property or home makes perfect sense. Not only is the overall price of the property lower compared to those not sold via foreclosure, the down-payment for such homes are also typically lower than the standard 20 percent of the appraised value that applies to nonforeclosed properties.

If a buyer were to take out a housing loan for buying the foreclosed home, monthly payments would also be comparatively lower because of the property’s bargain price. If the home is to be rented out later, doing so at a rate higher than the monthly mortgage payment would even garner the buyer a profit.

However, there are a number of considerations when it comes to buying foreclosed properties. These considerations may or may not be detrimental to the property, based on how they are approached.

Do foreclosures make sense - Lamudi Philippines
Photo via IngImage

1. The types of financial institutions that offer foreclosed properties vary

These include banks, insurance firms, SPAV companies that are formed under the Special Purpose Vehicle Act of 2002 to help banks shed non-performing assets, and public financial institutions like the Social Security System, Home Development Mutual Fund (Pag-IBIG Fund), and National Housing Authority.

The method by which the institutions sell the foreclosed properties also varies, as some may choose to do so via an auction, while others put it on the market with a set price. Others may do both, where low prices are posted on the market to draw more interest, but can be subject to change based on different buyers’ offers.

The best foreclosures indeed often ignite a bidding war, and in these instances the successful buyer must be ready with their down-payment within a month of being awarded the right to buy the property. With a limited timeline, buyers must make sure their finances are in order to ensure they do not end up making a purchase that does not make financial sense.

2. Foreclosed homes are sold as is

One of the most common aspects of foreclosures is that they are never intended to be sold, so when repossessed these properties are taken as they are. Because it would be an additional expense for the financial institution to maintain or improve foreclosed properties before selling, the nonperforming assets are sold “as is–where is” as well.

There are two sides to this coin. On one end, foreclosed homes almost always need some sort of repairs and improvements, and making these improvements can help increase the property’s value. On the other hand, the condition of the foreclosure may be too dire that it requires extensive repairs, making it a costly problem instead of a good deal for the buyer. In any instance, extensive research and meticulous inspection are key to ensuring that it is financially sound to buy, and subsequently maintain, a home being sold due to foreclosure.

3. There are associated fees and taxes, as well as other intangibles to consider

While it is easy to get drawn to the lower price of a foreclosed property, buyers must also take into consideration the fees and taxes associated with its acquisition, as these are commonly not included in the listed price.

In terms of future profitability, a foreclosed home is often likely to generate an ample amount given the low price that it is sold at. If the property continues to be improved, it has a great chance of being valued similarly or beyond those of properties just like it in the area.

However, other factors buyers may want to consider include knowing more about the area the home is in. If the area is expected to experience growth (due to infrastructure projects currently in the works or investment pouring into the area), then the likelihood of property values going up is high. It is best to also compare the foreclosure to other similar properties in the same area to get an understanding of its true potential beyond the foreclosure price.

Main photo via IngImage

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