Buying Foreclosures and Pre-foreclosures for profit

Investing in real estate is risky -- as anyone who has ever tried it knows only too well. Investing in properties that have been foreclosed is one of the most speculative aspects of real estate investing -- it can also be one of the most profitable. Itís relatively easy to find a foreclosed property -- but not so easy to make a huge profit. Most foreclosure homes actually sell for 5% below market value.

The number of foreclosures has grown over the last few years -- possibly helped by a spate of television shows and infomercials showing the huge profits that can be made. Around 1.2 million homes in the US were in foreclosure in 2006 -- an increase of over 40% from the previous year.

Foreclosures have been increasing for several reasons. Interest rates have risen on adjustable rate mortgages, causing some homeowners to default on their payments. And a slower property market in many areas of the country has meant that some properties just havenít sold in time -- making foreclosure inevitable.

Success in foreclosure investing can depend on where you live. In March 2007, the most foreclosed properties were located in Nevada, followed by Georgia and Colorado. The New England states, along with North and South Dakota had the least foreclosures. If you live in a part of the country that has recently suffered increased job losses, you may notice a higher number of foreclosures.

Many people think of foreclosure properties as being in undesirable areas. But during a recession, many desirable and more expensive homes go into foreclosure. Many small investors have also chosen to invest in real estate rather than deal with the uncertainties of the fluctuating stock market.

There are several different ways to find foreclosure properties and pre-foreclosure properties -- the internet has made the process a lot easier. Many web sites list court records and other documents that advise of mortgage arrears and foreclosures. Access to these sites typically costs from $15 to $50 per month -- although some listings are out of date or are duplicates.

There are basically three types of foreclosure opportunity -- the pre-foreclosure process (also sometimes called the default process), the auction process, and the REO (Real Estate Owned) process. Whereas all three methods have their risks, as far as potential profit goes, buying at auction potentially ensures the highest profits -- between 35 to 45% savings over the market value.

As the name suggests, buying a pre-foreclosure means dealing and negotiating directly with a homeowner, purchasing the property from them before it has actually been foreclosed on. Once you have purchased it, the idea is then to flip it quickly for a profit. Profits can average between 25 to 35% of market value, and itís also fairly easy to locate suitable properties.

There are disadvantages to the pre-foreclosure method. You may have a lot of other people interested in the same house and you may also have to negotiate with the homeowner at a difficult time -- they may be dealing with unemployment, divorce or bereavement. You will also have to deal with any liens on the property.

Buying at auction can be profitable but risky. At an auction, you have the opportunity to do some research ahead of time, but you seldom have the chance to inspect the property. You may also need to come up with a certified check for 10% of the propertyís value -- followed by the balance soon after.

Buying foreclosures at auction means that you have no title report or title insurance -- and you donít have the expert services of a real estate agent. And you purchase the property as is -- it may still be occupied which means that you will be prevented from renovating the property until the owners have left.

If you intend to purchase foreclosure properties at auction, you may have plenty of competition -- itís estimated that around 75 potential investors attend each foreclosure auction. And an increasing number of people attending auctions are experienced investors who are more familiar with the system.

The least risky method of buying foreclosures is the REO method. How this method works is that a lender will repossess a property due to the homeowner not paying the mortgage and then immediately try to sell it to recoup some of the losses. An investor can therefore buy the property from the lender at the right time, at a purchase price below the propertyís value. Buying property this way has certain advantages. The lender has probably already paid the property taxes, homeownersí fees and has the property title. They may sell at a discount if you need to spend money on repairs or they may do the repairs for you. You, the buyer, also have the opportunity to inspect the property before buying it.

Although itís the easiest way and involves least risk, purchasing REO properties offers the least potential for profit. As with any method of investing, you may also have plenty of competition from other potential buyers.

Real estate is risky and there is perhaps no sure way of making profits. All you can do is be as well prepared as you can and minimize the risks. Make sure you understand the basics of bankruptcy, title insurance and bidding at auctions. Study the real estate market in the part of the country you live in.

Foreclosure laws are different in each state -- study the laws in your state. Some states require what is known as judicial foreclosure -- meaning the lender has to obtain a court order for the sale of the property and sue the borrower.

Most experts advise that if you are new to real estate investing, you shouldnít dabble in foreclosures -- wait until you have a little experience. And when looking for suitable investment properties, always keep in mind one of the most important rules of real estate -- location, location, location.

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Last modified: April 30, 2007.
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