Investing in Foreclosures

You are sure to have heard a lot of hype telling you that foreclosures are a great way to make money in real estate. Although this can be true, it certainly is not a sure thing. We’ll give you some important guidance if you are interested in this area of real estate.

One benefit of a housing slowdown is the increase in foreclosures. Although awful for the folks experiencing a foreclosure, they can be great opportunities for buyers or investors looking for a good deal. As a recent Kiplinger’s article explains, however, foreclosures are anything but a sure thing, unless you are willing to do your homework and put in some work.

Compared with a year ago, foreclosures are up more than 60% nationally, and the chance of getting a good bargain is higher as lenders try introducing better deals to attract a smaller pool of buyers. The nationwide median discount off market value in the first half of 2005 was 14.6%, and that discount is steadily increasing. So, how much of a discount should you look for to know if something is a good deal? It depends on your post-purchase plans. Andy Heller and Scott Frank, real estate investors and authors of Buy Even Lower: The Regular People’s Guide to Real Estate Riches, say to use the following rule: the shorter the time you are intending to hold a property, the greater the discount.

For instance, if you plan to “flip” the property, you should be looking for a 20% to 30% discount off market value. If you are planning to rent the property out with the option to buy, you will need to look for a 10% to 20% discount, and if you intend to rent the property out indefinitely, you can settle for a 5% to 10% discount. Remember that the days when you could flip properties for a quick profit are no more – at least for a while.

You can buy foreclosures three ways: negotiate with the homeowner before the bank forecloses, bid at a county foreclosure auction or buy a real estate owned property, or REO. An REO is a property that lenders have bought back at an auction, and usually offers the easiest method for novices to get into the foreclosure ring. You won’t have to deal with an owner facing foreclosure and you will probably find nicer properties than those left on the courthouse steps by lenders. An REO is likely to be sold “as is,” but you will have the right to an inspection, a title search and contingencies, and you can finance the purchase with a conventional loan, but you aren’t likely to get as deep a discount as an investor in other types of foreclosures.

Your other option is a foreclosure auction, where you buy a home “as is” and you may not be able to do more than just peek in a window before you buy. These types of foreclosures can sometimes have a lot wrong with the property. Some owners vandalize properties, figuring that they are already in foreclosure, they might as well take anything valuable, which could include everything from door knobs to light fixtures to wiring. Or, they could feel a need to “get back” at someone by damaging the house, like breaking pipes or ripping up floors. Also keep in mind that foreclosed properties may not have had the best maintenance over the years, and many have water or mold damage. The property may also have a history of legal problems, such as liens, difficult-to-evict tenants or, in some states, a “redemption period,” a mandatory period that gives the former owner time to get the home back.

To find foreclosures, check your local newspaper as well as multiple listing services, which are available online, as well as the Web sites of federal agencies and government-chartered corporations, such as HUD.gov or Ocwen.com. Just remember what you are getting into and proceed with caution! If you follow the right steps, you may find yourself with a tidy little profit from a foray into foreclosures.

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