Making Sense of Buying Foreclosed Properties

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The foreclosure process begins when a property owner falls behind on mortgage payments. In some cases, the owners of foreclosed properties have been struggling to make payments for some time, and the property may have been neglected due to the inability of the owner to meet basic maintenance expenses. Even in upscale neighborhoods, homes needing serious work are not uncommon. This may be the opportunity an investor is looking for. Houses needing work might fetch bargain prices and repairs can cut into profits, but it may be worth it. If the home is in generally good condition, is in a good location, and the cost of rehabilitating it for resale or rent are reasonable, then consider making an offer.

Ways to Buy Foreclosed Properties

There are three main ways to buy foreclosed properties. The first is to purchase the home while it is in the pre-foreclosure stage. This is generally considered the best deal, as the homeowner is spared the foreclosure and the parties involved (the investor, the bank, and the owner) agree on a price. Making a low offer here is key, and banks will often accept low offers to avoid foreclosure. This method represents a way to buy cheap, and with some elbow grease or smart repairs, get some instant equity.

Another way to go is to buy at the REO (real estate-owned) stage, where the home that was taken back from the owner and is held by the bank. Deals can be found here also, but the bank will be looking to recoup some its losses. Depending on the condition of the home you're looking for, it may be worthwhile to investigate this option. Homes at this stage may have had repairs, improvements, or upgrades completed at the bank's expense. This option could be ideal if the investor is simply looking for a home for himself rather than an investment. It can be argued that this method is the safest, as the lender might offer to finance the property at a below-market rate or with a lower-than-usual down payment. Also. the bank already has done an appraisal and deals typically include title insurance, which eliminates much of the risk that accompanies buying homes earlier in the foreclosure process.

Finally, the property can be bought at auction. Again, this may not be the ideal method for several reasons. Auction houses fees, property condition (an inspection may not be possible) and financing options (cash down payment, for starters), could restrict an investors ability to buy even in a best case scenario.

Getting In and Avoiding Mistakes

With good credit, many banks will loan the full price of the foreclosure or more. Properties intended to be used as rentals will typically require a down payment, and financing terms could vary. Foreclosure homes bought in good areas at below market values can be a sound investment strategy as the property appreciates annually.

Homes used as rental properties often allow investors significant tax deductions while the property increases in value. With many stock portfolios taking a hit, investing in foreclosure real estate may be a good alternative.

It's essential to get any property inspected before purchase to avoid surprises or a bad deal. If the property is being sold "as-is", be careful. Home valuation tools, like,, and, can give an investor an idea of what the property could be worth, and what nearby properties are worth based on recent sales. Other factors, like area development, schools, environmental issues, and crime rates, may be worth taking a look at before a property is purchased.

About the Author: Casey Shea

Read more on real estate foreclosure investing on his Blog, Investing in Foreclosures.

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Tom said:

you wrote (quote) valuation tools, like,, and, can give an investor an idea of what the property could be worth, and what nearby properties are worth based on recent sales (end quote).

But how can current (discounted) prices for houses which are sold on an emergency basis resemble the true value for a house. Don't these tools give just he current trend or is there more?

the boozwatt team Author Profile Page said:

That's a very good question. You're right that it only provides information on current trends. For properties that our company buys, for example, we use local sources for more accurate, representative valuation, however a one-stop internet site likely exists out there somewhere. We strongly suggest that readers submit their suggestions if they're aware of any.

What sites do all of you use?

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