Is It a Good Idea to Buy in a High-Foreclosure Area?

By Markets Fool.com

In 2012, my partner and I purchased a three-bedroom, two-bath, 1,450-square-foot ranch home in good condition, located in the suburbs outside Atlanta. During the peak of the housing market, the home previously sold for $97,000. We snapped it up for only $21,000. We put $10,000 (plus some "sweat equity") into renovating the house, bringing our total costs to $31,000.

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Why was it so cheap? One word: foreclosure.

Not only was the home itself a foreclosed property (it was listed as an "REO," or "real estate owned" by the bank), but it also was located in a high-foreclosure area. Slowly, as other buyers purchased neighboring foreclosed homes in the area, property values started to rise.

Today, three years later, that house is worth approximately $55,000 -- roughly double our acquisition price.

So should you buy in a high-foreclosure area?
Foreclosures are slowing down
, but several parts of the nation still have high numbers of foreclosed homes on the books. With many foreclosed properties still on the market, buyers might be wondering whether they should purchase these homes.

While foreclosed properties (and their surrounding neighborhoods) can offer great deals, there are also certain issues to watch out for when buying in an area with high foreclosures. Here's why you may (or may not) want to buy a home in an area that's still heavily affected by foreclosures.

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What are the benefits to buying in a high-foreclosure area?

More affordable: Banks generally don't want to hold on to REOs for too long -- each month that goes by means another month of taxes, maintenance, and other costs they have to cover. Because they're eager to unload the property, they may offer a significant discount.

Likewise, if a neighborhood is filled with discounted houses, then neighboring properties will also sell at a lower price -- even if that specific property isn't a foreclosure.

Lots of options: You can find foreclosure properties at a variety of price points, from tiny bungalows to sprawling luxury homes, so whatever your current budget, there's a good chance you can snag a deal on a foreclosure.

Value appreciation: If you buy a foreclosure that's a little rough around the edges, you can make repairs and upgrades that will add to its value. When it comes time to sell, you could price the home for considerably more than you paid for it.

If your home isn't a foreclosure itself but is located in a high-foreclosure area, you may still experience significant price appreciation once the remaining foreclosure inventory in your area gets snapped up by other buyers.

Give back
Foreclosures bring down the overall value of the whole community. When you buy one of these homes and put in the work to improve it, you're adding stability to the community and participating in neighborhood recovery. If others are also dedicated to improvement, you could find yourself in a close-knit, active community that's on the upswing.

What are the drawbacks?

Steep competition: Since they're priced so low, foreclosures can get snapped up quickly. Be prepared to act fast and face a bidding war. (You can also read Trulia's tips on how to survive a bidding war.)

Costly repairs: Many foreclosures are sold as-is, and repair costs could seriously offset any savings you'd receive. The previous owner may not have been able to afford basic maintenance and upkeep, or might have intentionally trashed the home upon move-out. If the home has been empty for a while, it could have suffered a burst pipe, mold growth, or pest infestation. Empty homes are also prime targets for looting and vandalism.

Neighborhood instability: Communities with a large amount of foreclosed properties often suffer other issues like higher crime rates, which may not make the home the right investment for you.

Hidden costs: If there's a lien on a foreclosed property, you could find yourself paying off the previous owners' debts. If the previous owners haven't left, you could also have to pay for eviction proceedings.

Time and frustration: Buying an REO can be a time-consuming and frustrating process, with lots of paperwork to fill out and red tape to cut through.

Slow to appreciate: While you may make capital improvements to the home, that doesn't necessarily mean its value will appreciate. Foreclosures can weigh down the overall market values in a neighborhood, so buying in a high-foreclosure area means your home could take longer to appreciate (even if your house isn't a foreclosed property).

Is buying a home in a high-foreclosure area worthwhile for you?
If you're aware of what you're getting into, prepared to do some extra work, and willing to accept a bit of risk, it could be a great investment. Just make sure you go into it with your eyes open.

This article originally appeared on Trulia.


The article Is It a Good Idea to Buy in a High-Foreclosure Area? originally appeared on Fool.com.

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