While many people begin worrying about how many foreclosed houses are appearing on the market during times of recession, smart investors know that these are often the best times to make some serious profits.
Why Do Foreclosures Happen?
Foreclosures happen when the owner cannot pay his or her debt to a lender such as a bank. During a mortgage agreement between owner and the lender, the property was used as collateral for a loan. The foreclosure follows the contents of the mortgage contract wherein the mortgagor has to surrender ownership to the mortgage upon failure to comply with the terms of payment.
Why Invest in Foreclosed Properties?
So what is the difference between properties that are foreclosed and those that are not? Typically, properties involved in foreclosures are cheaper because they can be bought way below market prices. It is this fact that makes them desirable for real estate investors.
Typically there are three possible opportunities for buying foreclosed homes. Each option has its advantages and disadvantages.
Finding Foreclosed Properties
The first option is to try and buy property during pre-foreclosure. Pre-foreclosed properties are homes that are still owned by the home owner. This means the bank hasn’t taken possession as yet. The current owners are very motivated to sell the house to get themselves out of trouble, so you could easily pick up a great bargain.
What is a Court Auction?
The second option is buying during the court auctions after the property has been foreclosed upon. The disadvantage to an investor in this situation is that if there are several bidders at the auction, this could drive the price higher than you were willing to pay.
Purchase Directly From Lenders
The third option is buying after the lender has acquired the property and taken full ownership. Banks aren’t in business to buy property. They make their profits by charging interest on money they lend out to people, so its in their interests to sell any property they’ve acquired. In many cases, they’ll happily negotiate with you on the purchase price of the property. This can be one of the simplest ways to purchase real estate at a reasonable price.
Whatever option y ou choose, you should always inspect the property and the associated property and loan documents yourself. This is especially true when you are dealing with the original property owner directly.
Once you’re sure the numbers stack up the right way, you could easily be purchasing an investment property that is valued so much higher than the price you paid for it. Wise investors also understand that by keeping purchase costs low, they also have the opportunity to build an ongoing source of income as the rent can often exceed the costs associated with owning and maintaining the investment property.
A wise investor will realize the potential value of buying a foreclosed home at a discounted price to its real market value, especially in light of the recent reduction in real estate values. This can represent a double-benefit to a clever investors portfolio. Not only are you gaining extra equity in the form of higher market value than the original cost, but its also possible to keep your purchase costs low enough so that any rental income derived from the property will easily cover all the associated costs of the mortgage and operating costs of maintaining an investment property.
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