Overview of Foreclosure Investing

Foreclosure investing involves investors trying to earn profit by buying a foreclosed property, rehabbing it as needed and selling it for a higher price. In the wake of the collapse of the real estate market, the number of foreclosures exploded. While those numbers have decreased somewhat, there are still plenty of opportunities to invest in foreclosures. Foreclosure investors hope that the money they spent to buy the property and make repairs would be more than made up for with the profits earned from the sale. However, this is far from guaranteed, so investors should not attempt to invest in foreclosures unless they are willing to take risks.

Understanding Foreclosures

If a borrower fails to make mortgage payments on time, he or she will default on the mortgage. While some lenders will try to take steps to prevent defaults, not all lenders are willing to do that. Once the borrower defaults on the mortgage, the lender moves in to take over the house so that it can sell it in hopes of recouping at least some of the losses that resulted from the borrower failing to repay his or her mortgage in full. The lender sells foreclosed homes at a public auction, and the property will go to the highest bidder.

Securing a Foreclosure For Investing

Most foreclosure investors buy the foreclosure at public auctions. The auctions are advertised in newspapers and on the Internet ahead of time. It is a fast-paced process that requires investors to be able to respond quickly and decisively. Once the investor wins the auction, he or she can use the property as he or she wants.

The problem with this approach is that investors don't have the opportunity to inspect the properties offered at the auction ahead of time. As the result, they are essentially betting blind, without any idea what kind of repairs they would have to make and how much they would have to pay to make them. Furthermore, they have no time to investigate whether the property contains external and internal hazards. For example, many older houses contain asbestos, and/or lead paint, both of which cause long-term damage to the residents' health. If the investor ever hopes to sell the house, he or she must do it at his or her own expense. 

In the worst-case scenario, the house may still be inhabited. Either the borrowers didn't leave the house or they rented out the house to somebody else. In the later case, nobody is obligated to tell the tenants that they are living in the foreclosed property, so they are usually none the wiser. Either way, the investors must evict whoever is residing at the property, paying the resulting legal expenses as necessary.

Foreclosure Investing in a Short Sale

Investors can try to avoid the above-mentioned issues by buying the house after the borrower defaults but before the lender forecloses upon it. Investors can look up defaulted properties are listed in their local newspapers. Then, they can contact the owner of one of the defaulted property and offer to buy the house as a short sale.

A short sale occurs when the house is purchased below it's original purchase price. Buying it a short sale allows the investor to inspect the house and gives the borrower enough time to leave the house and sort things out with the tenants (if the borrower has any). However, buying a property as a short sale carries it's own risk. Before the investor can buy the property, he or she must get the lender's approval. If the lender does not approve the short sale, the investor would have to start from scratch. In some cases, the lender will use the treat of negating the sale to coerce the investor into paying more money, even if doing so would make this foreclosure investment unprofitable.

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