Investing in foreclosure properties may sound like a no-brainer. You buy a home at auction for pennies on the dollar, then quickly sell the property for a large profit. In reality, if you go into investing in foreclosures with that mindset, you are not likely to be a successful investor.
Foreclosure Profit Formula
There are ways, however, to invest successfully in foreclosure properties once you know what you are doing. If you can buy a foreclosed home in a good area below the market value, you can make money investing in foreclosed homes.
Know what the home is worth in your market. Study what other houses in the area have sold for, not what sellers are asking. If you cannot get this figure, perhaps because there have been no recent sales, do not invest in the property. You cannot expect to make a profit unless you have a good idea what the property is worth in the marketplace.
Learn what your state's laws are regarding owners who are about to default on their home. Many people who invest in foreclosures do so by striking a private deal with a person they know is in a distressed situation. Make sure that the deal you structure is legal, I good website resource is All-Foreclosure.
Have cash. If you plan to invest in foreclosures at an auction, you must have cash, according to “Investing in Real Estate.” Be warned, though, that the auction process is risky. Buyers must buy the property “as is” with no guarantees about the physical condition of the home.
You may wind up spending so much in home improvements that you will not make a profit. In addition, you may have an eviction on your hands. Even so, you can make money at an auction by buying a home at a much lower price than market value, mainly if you are able to research the property first.
Search public records yourself or use a title company to see if there are any liens on the property. This should let you know if there are encumbrances such as an unpaid property tax lien, mechanic's lien or a homeowner's association lien on the property. You may want to pass up the property if there are liens on it.
Bank-owned properties are safer investments because there are no liens or tenants to evict. In addition, a bank that is eager to sell may give you a good deal, according to George Tribble, past president of the California Association of Mortgage Brokers, in his MSNMoney article.
Invest in a “hidden foreclosure.” No one ever lived in these homes. Many builders thought the midscale and upscale homes they were building would sell, but never did by the time their construction loan period was over, according to MSNMoney. The lender now owns these homes and uses a real estate agent to try to sell them.
Where to Find Foreclosures?
Search for foreclosure listings in real estate magazines, newsletters, newspapers and Internet search engines. Call lenders for real estate owned (REO) properties lists of foreclosures. Government agencies such as Fannie Mae (fanniemae.com) and the Department of Housing and Urban Development (hud.gov) also advertise foreclosed homes for sale. Check public records for other leads. A lender deciding to foreclose must file a notice of default in the local county clerk's office.
Be prepared to deal with more paperwork with a foreclosure than you would with a conventional purchase, particularly when a government agency is involved.