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Investing in foreclosures is no doubt one of the best opportunities to make money in today’s economy. As with any type of business venture, there are risks involved. Investing in foreclosed properties offers great opportunity to buy homes significantly under market, but there are some risks such as considerable research, underlying lien problems, long-term carrying costs and several others. If you are willing to take the chance on a property or two you may prosper in the end.
Foreclosed homes can be purchased at several stages. First is the pre-foreclosure phase, then the auction phase and finally the REO phase. Each of these presents their own set of pros and cons. Familiarize yourself with each of these different types of foreclosures, weigh the pros and cons for each, you may be able to avoid costly mistakes and headaches through the process of investing in home foreclosures.
Take a look at the possible pros and cons at each various stage of a foreclosure:
Pre-Foreclosure Phase
This is the stage where the homeowner is still in control of the property. Although the loan is in default and the pressure from the lenders is just beginning. The homeowner is usually in a position to sell the property quickly and avoid the foreclosure process all together. This means huge savings and large potential profits for you.
Pros
- 20-40% discounts on the estimate value
- Low or no down payment, due to the built in equity
- Research and inspection opportunities
- Sales agreements that are flexible
Cons
- Home owner may not be reachable
- Fierce competition, many investors are trying to buy these types of foreclosures
- Time to research documents and court filings
- Undisclosed or underlying liens against the property
Auction Phase
This is possibly the most profitable stage of a foreclosure. Auctioned properties usually offer the best potential profit when buying foreclosures. An auctioned property is sold during a public auction to the highest bidder. If you have done your research, these types of properties are sometimes sold way under market value.
Pros
- Greater discounts can be as high as 35-50%
- Great ROI, return on investment
- Greater potential profit
Cons
- Property inspection is generally not available
- Postponed auctions mean valuable time lost and research wasted
- Large down payments that must be paid at the time of auction
- Incomplete research can cost you a lot of money
- You may not win the auction at all
REO Phase
An REO occurs when the lender retains the property after the auction phase. If the bids are not high enough during the auction, the lender will bid on the property to seize control and resell it themselves. In most cases, the property has no value to the lender until the house sells; in this case, the lender is usually motivated to sell the property fast.
- Pros
- Discounts of 5-18%
- Clear title, free of all liens
- Back taxes are up-to-date
- Lenders may do the repairs, or offer additional discounts
Cons
- Low ROI (return-on-investment)
- Research must be very thorough
- Potential for loss in the end
When investing in real estate, especially in foreclosures, there are significant risks involved. While there is great potential to make a substantial profit in foreclosures, you need to make sure that you do your research and fully understand what your risks are. Properties that offer the greatest profit potential are often the most risky investments.
Bill Manassero is the founder/top dog at “The Old Dawg’s REI Network,” a blog, newsletter, and podcast for seniors and retirees, that teaches the art of real estate investing. His personal real estate investing goal, which will be chronicled at olddawgsreinetwork.com, is to own/control 1,000 units/doors in the next 6 years. Prior to that, Bill and his family lived in Haiti for 11 years as missionaries serving orphaned, abandoned and at-risk children.
