There are many advantages and disadvantages to buying foreclosures as well as properties via the tax sale process. Today I will discuss foreclosures, with only brief comparisons to tax sale properties.
- Purchase Price - Most foreclosures are the result of not paying the monthly mortgage to a bank. When the mortgage goes into default and the bank takes them back, after a long legal process. The bank generally hires a Real Estate agent to sell the property. The bank wants to recover as much of their defaulted mortgage as possible, at the same time they want to get the property off their books so they sell at a discount. Foreclosure sales generally have a much higher purchase price than tax sale because the County or local government is only trying to recover the back taxes, in exchange for the deed to the property. However, the tax sale price is firm and set by state statute, whereas the foreclosure sale list prices is somewhat negotiable. In my opinion tax sales are by far are the most discounted properties you can find outside of getting properties for FREE!
- Current Deed - Since foreclosures are marketed by professional Real Estate agents on the multiple listing service (MLS). They must follow a long list of rules, regulations and legalities that agents are trained to provide. Unlike a tax sale or a sale from another investor, I find that there is no need to to view the current deed. TIP: When buying investment property that is listed in the MLS GET YOUR OWN Real Estate Agent! I suggest that you NOT contact the listing agent because they represent the seller/bank. Go to Zillow put in the property address and contact one of the agents listed in the sidebar. Their fee is transparent to you as the buyer!
- Title Search - Again because there are agents involved they will use a traditional real estate settlement. This is unlike a tax sale where you pay the County and they send you the deed. When buying foreclosed properties via a real estate agent, there is no need to purchase a title report in advance, it will be provided at settlement.
- Property Inspection Report - Real Estate agents have entry access to foreclosures that are listed in the MLS. Whereas tax sale properties cannot be entered for an inspection prior to purchase. Since you will be paying more to purchase foreclosed properties make sure you get your money's worth and have the agents earn their commissions. The agent should be able to provide current photos, and a comparable market analysis as well as coordinate access for your property inspectors and or contractors to provide you repair estimates.
- Property Condition - Generally speaking foreclosed properties need fewer repairs than tax sale properties. In some instances there will be little or no work required on foreclosed properties. It is not uncommon that tax sale properties need to be demolished completely, this is another reason they are being sold so cheap.
- Funding the Purchase - When making an offer to a bank to buy a foreclosed property using Real Estate agents you must provide proof of funds (POF). Whereas in a tax sale purchase you give certified funds in exchange for the deed to the property. Getting a POF is actually very simple. We have several lenders (CLICK HERE) that will provide them, but there is a fee that you need to consider.
- Exit Strategies - I find your exit strategies may be reduced when you purchase a foreclosure, however this is a minor consideration IF you purchase them at a deep enough discount. For example, let’s say you do purchase a foreclosure for $48,000 that was listed in the MLS for $50,000. The property has an after repaired sale value of $75,000. You may or may not do any work and want to re-list in the MLS at $60,000 to sell quickly to get your profit, pay a sales commission and cover other expenses. All the new potential buyers will see previous listing of $50,000. So the question becomes why will they now pay you $60,000? Therefore, re-listing a foreclosure in the MLS might not be a viable exit strategy, certainly there are other options, but this is certainly one you need to consider. In comparison, tax sale properties are not listed in the MLS by the County.
In summary, advantages and disadvantage exist for every real estate acquisition. When investing in foreclosed or tax sale properties you’ve got to do your homework to avoid making costly mistakes, and always get professional legal advice.
Hope this helps, and as always, here’s to your continued success!