The Risks of Foreclosure Flipping in a Real Estate Market Downturn
There are always house flipping risks associated with trying to make fast money on foreclosures, but flipping foreclosures in a bad market carries even more risks. What’s more, there are foreclosure flipping risks even in housing markets which are considered ‘good’. Like many things in life, the real estate market tends to be cyclic. There are house flipping recessions and house flipping booms. However, foreclosure flipping risks remain constant in any market. Here are some of the most perilous house flipping risks to look out for:
Sabotage
The foreclosure of a home can cause rational people to do irrational things. A homeowner who is about to lose his home might think, if he can no longer have the house, to heck with it, since the bank is taking it. The homeowner then sabotages the home in ways that won’t become visible until after he leaves. The possibility of this foreclosure flipping risk is very real and could costs the flipper a ton of money.
The bottom could fall out of the market
When foreclosures are up, the housing market is generally in a downward trend and flipping foreclosures in a bad market is especially risky. When you buy a foreclosed home for flipping, you always run the risk of the bottom falling out of the housing market.
Unforeseen risks
As foreclosed homes are owned by banks or other lenders, unforeseen risks are always a factor because a bank will want to fix a house’s problems on the cheap with cosmetic fixes. Another facet of this is the bank may be remiss about checking the quality of the work and an unscrupulous contractor might take shortcuts or use inferior materials.
That foreclosure flipping deal might be no deal at all
The bank or lender that owns the foreclosed home is going to ask whatever they think they can get for the foreclosed home to cover their investment. Unless a buyer really knows what they are doing, that ‘once in a lifetime deal’ might be no ‘deal’ at all. So always do your homework and include an estimate of remodeling costs in your cost benefit analysis.
Losing money on the deal
In house flipping recessions and house flipping boom times, a flipper always risks losing money on the deal. This can happen in countless ways. It is similar to playing the stock market. Sure, your investment could pay off handsomely, but unless you do your homework and have a well designed project plan, you could lose your shirt!
Flipping foreclosed homes can be a great way to generate money. Buy cheap, invest a modest sum to fix it up, sell high, pocket the profit. But the foreclosure flipping risks outlined above are only a few of the many reasons why this is a financially risky proposition. Ultimately, it is for the buyer to determine whether the financial rewards outweigh the foreclosure flipping risks, but as the old saying goes, “let the buyer beware!”