Buying foreclosures and Pre-foreclosures

2 years ago

If you've ever tried investing in real estate you know it's a risky business. Foreclosed property investment is even more speculative. Having said that, real estate investment in foreclosed properties can also be very profitable. Nevertheless, it may be easy to find foreclosed properties, but not as easy to make huge profits. Sales of 5% below market value is what most foreclosure homes sell for.

Over the last several years the foreclosure of homes has become a growth industry. The reasons are varied but increased interest rates on variable rate mortgages is just one concern, causing defaults on homeowners' payments. In 2006 alone foreclosures increased by 40%, which meant 1.2 million homes in the US experienced a slower property market in some areas and just couldn't sell in time.....resulting in the inevitable foreclosure. This phenomenon was further helped along by the media - television shows and infomercials showed the huge profits which could be made.

Where you live can determine how successful your foreclosure investing will be. Nevada, Georgia and Colorado had the most foreclosed properties in March, 2007. The least foreclosures occurred in the New England states, followed by North and South Dakota. A higher number of foreclosures can also result if you live in an area suddenly suffering large job losses.

While the general opinion is that foreclosed properties occur in undesirable areas, this is a misconception. During a recession, even desirable and expensive homes can suffer. In an uncertain stock market, with fluctuating results, small investors will often choose real estate in which to invest.

Finding foreclosure and pre-foreclosure properties can be done in many ways, however, the internet has made the exercise a whole lot easier. Court records and documents advising of mortgage arrears and foreclosures are found on many websites. The cost to access these sites usually cost from $15 to $50 per month but some listings can be out-of-date or duplicated.

Three types of foreclosures are your basic opportunities: the pre-foreclosure process (the default process), the auction process and the Real Estate Owned (REO) process. Even though all three have their risks, buying at auction potentially ensures the highest profits - between 35 to 45% savings over the market value.


Dealing and negotiating directly with the homeowner, you are purchasing the property from them before the foreclosure actually occurs. Once purchased the idea is to flip the property quickly, which could generate an average profit of between 25 to 35% of the market value. Finding suitable investment properties is also relatively easy.

The disadvantage to the pre-foreclosure method is that usually a large number of other people want the same house plus you may have to negotiate with a homeowner facing difficult times such as suddenly losing their job, a divorce or bereavement. You also need to deal with any liens that may be on the property.


A potentially profitable venture but not without its risks. Seldom does one have the opportunity to inspect the real estate up for auction, however, you do have the opportunity to do some research beforehand. In addition it is often necessary to produce a certified cheque for 10% of the property's value, and soon after the full balance.

Buying a foreclosure at auction denies you the benefit of a real estate agent, not to mention there is no title report or title insurance. The property must be purchased as is and if it is still occupied you can not begin renovating until the owners or tenants have left.

Purchasing foreclosures at auction is also very competitive, Each auction is attended by approximately 75 potential investors, with an increasing number being very experienced at attending foreclosure auctions.

Real Estate Owned (REO's)

The least risky of buying foreclosures, the REO method allows the lender to repossess a property when the mortgage can not be paid and then selling it immediately in order to recoup some of the losses. If you are in the right place at the right time, an investor can buy from the lender at a purchase price below the property's value. Advantages to this form of investment property purchase is that the lender may have already paid the property taxes and homeowners' fees and would also have the property title. If the property needs repair, they may sell it at a discount or may do the repairs for you. As a buyer, you also have the opportunity to inspect your investment property beforehand.

As with other investment methods, you will likely have a great deal of competition and, although its easy and involves the least amount of risk, this form offers the least potential for profit.

Real estate investment is a risky business with no guarantees of making a profit, however, if you do your research, prepare thoroughly, understand the basics of bankruptcy, title insurance and how to successfully bid at auctions, your risks can be minimised.

Studying the real estate market investments in your area, or the area in which you wish to purchase, is essential as each state has different foreclosure laws. In some states judicial foreclosures are required whereby the lender obtains a court order for the property sale and then sues the borrower.

Experts advise against dabbling in foreclosures if you are new to real estate investing. Wait until you have a bit of experience behind you and as you look for suitable investment properties always remember the most important rule of thumb in real estate - location, location, location.

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