Investing in a foreclosed home

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While a market cool-down can cause distress for homeowners, it also leaves the door open to unique opportunities. For Canadians looking to invest, a foreclosed home presents an attractive pathway to added funds.

Private equity firms routinely purchase foreclosed homes at low prices with the intention of renting or selling them once prices rise again. However, this type of investment is open to all consumers, not just financial firms.

Mortgage rates are currently at historic lows in Canada, making it the perfect time for consumers to invest in a foreclosed home. By purchasing the property at a low rate, you’ll be saving a considerable amount of money on the deal. For savvy investors, the process can pay higher dividends than traditional investment funds, or even provide an added boost to retirement funds.

Of course, before you get started, there are some general rules and strategies to follow to ensure you don’t squander your investment opportunity.

Type of foreclosure
There are two types of foreclosures in Canada: power of sale foreclosures and judicial sale foreclosures. How a foreclosed home is being sold depends on who is selling it. The easiest way to find out is to contact the lender.

A power of sale foreclosure indicates the the property was repossessed by the lender due to lack of payment. Since court authority is not required for power of sale foreclosures, they usually move faster.

A judicial sale foreclosure simply means that the lender must petition the courts for the right to sell the property. Since this process requires court authority, it generally takes longer to complete.

Once you know what type of foreclosure you’re dealing with, you can proceed. If it’s a power of sale foreclosure, you’ll want to begin negotiations with the lender. If it’s a judicial sale foreclosure, there’s a chance that the court will sell the house at auction. This can be either beneficial or disadvantageous depending on the other bidders. 

Once you own the property, it’s important to keep it maintained and in proper selling form. The whole point of investing in a foreclosed home is to sell or rent the property to new tenants down the line. In order to do that, the property should be desirable.

It may seem antithetical to your initial goal to sink money into your new property, but an investment means you’re expecting significant profits down the line, not a small profit immediately. There’s truth to the old saying that it costs money to make money. In addition, repairs you make to the property will only add value to it, ensuring more money for you from a sell.

Timing is the most vital part of investing in a foreclosed property. Current mortgage rates make now a great time to buy, but it’s probably best to wait before selling your new investment. The market cool-down means that home prices will most likely be falling in the near future. However, like all economic systems, the housing industry moves in cycles. Sure enough, home prices will begin to rise again. Once prices are high enough, selling your investment could net you a hefty profit. Of course, it’s also possible to keep control of the home and rent it out, ensuring a steady stream of extra income for as long as you remain the landlord.

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