It is still challenging to find an affordable home to buy in the U.S. As of May 1, although 15% of sellers lowered their asking price, 56% of homes were purchased higher than the asking price. If you are a home buyer, you may want to buy a house like an entrepreneur -- find the lowest price to profit. But is there a way to do that in the current housing market? This article will explore the options and the pros and cons of each.
Remember that thinking like an entrepreneur does not mean just choosing to buy the lowest-priced item. That will not always be the most profitable choice in the long run. You must instead weigh all factors that can influence profitability.
Property on Short Sale
You may have heard that houses on short sale are a good deal. Know the facts first.
Houses on a short sale are those in which the owner owes more on the mortgage than the home is currently worth. The owner and lender agree to a lower loan payoff to avoid foreclosure. The lender, usually a bank, may want to sell the property at market value. The bank may reject offers below market value.
Reasons a Short Sale Might Be a Good Idea
None. You will also have to pay market value.
Reasons a Short Sale Might Not Be a Good Idea
You might have to wait a long time for the bank to approve the sale, during which time interest and late fees could accrue on the property's mortgage. You will have to pay for those, too.
The seller might not be motivated to keep the property in good condition while waiting for approval, leading to hidden repair costs down the road.
The lender could reject the offer, leaving you back at square one.
You may find a lower price among pre-foreclosure homes. Owners are behind in their mortgage payments and these homes are about to be foreclosed. The bank gives the owner the option to pay the mortgage owed or to sell the house.
Owners usually do not know the current market price for their homes. Their primary concern is to avoid foreclosure which will negatively affect their credit history. Often, they would settle for the buyer to pay off the entire remaining mortgage and homeowners insurance fees, shoulder all the costs of closing the sale, and give them a little money to relocate.
Reasons Buying Pre-Foreclosure Property Might Be a Good Idea
You get a low price.
You are buying directly from the owner, hence the sale process can be quick.
You can get a professional inspector to inspect the property before closing the sale so you know what repairs will be needed and how much these will cost. You can determine if it is still worth the price you will be paying.
Reasons Buying Pre-Foreclosure Property Might Not Be a Good Idea
If you have to apply to a mortgage company for a loan, another buyer who can pay cash may beat you to the sale.
You have a very small window before the bank starts foreclosure and you have to close the sale within that window. Otherwise, all your costs for inspection and the like are lost.
The inspector may find extensive damage that will be too expensive to repair. Adding this to the price may put the total cost above market value.
The state where the property is located may have regulations protecting owners of pre-foreclosure property, giving them the right to rescind the sale when they get back on their feet.
Foreclosed properties are those in which the owner has failed to make their mortgage payments and the lender seizes the property. A foreclosed property is then first put up for auction by the sheriff. If the house is not sold, it reverts to the bank. The bank then sells this as real-estate owned (REO) property.
Reasons Buying a Foreclosed Property on Auction Might Be a Good Idea
You might get a good deal if you have no competition.
Reasons Buying a Foreclosed Property on Auction Might Not Be a Good Idea
You are not allowed to inspect the property. You must buy it "as is" and run the risk of discovering that it needs expensive repairs.
You have to pay for all back taxes and existing liens on the property.
Reasons Buying a Foreclosed REO Property Might Be a Good Idea
You might get a good deal since the bank wants to sell the property quickly.
The bank clears any back taxes or liens before selling the property.
Reasons Buying a Foreclosed REO Property Might Not Be a Good Idea
You cannot inspect the property because it is sold "as is". There is a high risk that it is in disrepair and will be costly to rehabilitate.
The process is arduous, time-consuming, and requires lots of documentation.
Compare Your Risks to Potential Profits
If you want to think like and buy a house like an entrepreneur, compare the risks of each property against the potential profits you may gain from it. Can you afford the money and time you may lose? If you can afford the risk, is the gain worth the effort? If you can answer yes to both questions, go for it.