Every city and town across the country has been hit with at least a few foreclosures in recent years, including Richmond, Virginia. For those looking to invest in property, the word “foreclosure” can send up some huge red flags. After all, if a property has been foreclosed on once, is there an underlying reason that the property may not be a good investment the second time around? In some cases, it’s simply due to the original owner or developer getting in over their head and biting off more than they can chew. In other cases, however, it could be that the surrounding community simply wasn’t a good fit for the type of property being developed. When taking a look at Richmond foreclosures specifically, though, it would seem that they’re a fairly safe investment.
In order to alleviate some concerns, first let’s take a look at what causes a foreclosure in the first place.
What Is A Foreclosure?
A foreclosure, by definition, means that at some point the mortgagor of a property, whether they were a developer, landlord, or owner of a single-family home, was unable to pay what they owed to the lender. Generally, there are quite a few steps that have to be taken before a property is foreclosed on, but when it is, it's essentially repossessed by the lender, the occupants are evicted, and the property is typically re-sold at auction in an effort for the lender to recoup some or all of their losses. Generally speaking, Richmond foreclosures occur because a property was either initially purchased at a price that the borrower can no longer afford (especially if it was purchased at the height of a real estate bubble), or because there may be additional liens on the property that can’t be paid (such as property taxes or second mortgages). In some cases, the mortgagor may find that they owe more on the property than it’s worth (this is considered being “upside down”) and that they’re unable to sell it for an amount that would allow them to pay back - at the very least - what they owe to their lender. This can be the case for both residential or commercial properties.
For commercial properties, there may be a few additional underlying factors. It may not be a matter of purchasing a property at a higher price than it’s worth, but rather purchasing - or building - a property that simply can’t be sustained by the local community. Take, for example, a commercial development that was meant to house a few mid-sized local retailers. Unfortunately, small businesses that are just starting off may have difficulty finding their footing and one-third of them will close within their first two years of operation. This would mean that developing a space specifically to house these mom-and-pop type of ventures may not be a profitable route as the tenants may have difficulty paying their rent, which in turn would land the developer in hot water with their financial backers. However, if the commercial space had been developed to house a large, national big box store or a well-established local business, they may have had more success with seeing a return on their investment.
Why Should I Invest In Foreclosures?
If you’re interested in investing in real estate, now is actually an excellent time to invest in Richmond foreclosures. Due to their very nature, foreclosures are often sold at a price much lower than market value - and with Richmond having been named the fourth “hottest market” in the United States by Zillow in 2016, there’s never been a better time to jump into the investment game. One of the factors that earned Richmond their ranking was the fact that it showed strong income growth, a low unemployment rate, and steady home value appreciation rates when compared to other cities across the nation. This means that although a Richmond foreclosure may have initially been purchased at a price that was unsustainable and caused the original owner financial distress, the fact that it’s probably available for purchase at below-market-value prices in a market that just keeps getting better is a great sign.
That said, at Walnut Street Finance, we don’t simply lend to our borrowers because a deal looks good on paper. We’re in the business of ensuring that our investors see strong, stable returns on their investments and therefore, we do our due diligence to ensure that a proposal from a borrower - whether it’s for commercial or residential property - will be a worthy investment. This means taking a look at what caused the initial foreclosure, taking a look at the current market value and the market trends, and examining what the borrower is proposing in terms of their building and/or renovation plans versus what the community can sustain. This includes considering whether proposed renovations to single-family homes are renovations that would increase the value of the home and entice buyers in that specific neighborhood that the property is located in. By doing this, we’re able to make well thought-out lending decisions that keep our investors’ funds safe. Are you interested in learning more about investing in real estate with Walnut Street Finance? Check out our guide: