Today hundreds if not thousands of foreclosures go to market every month. This is a lucrative business for smart investors. You can invest in a property that may double in value in a few years when the market turns around. Let’s learn more about investing.

Pre-Foreclosure Investing

Foreclosure usually happens when property owners fail to make their mortgage payments on time. This is a gradual process that usually occurs over several months. Lenders often foreclose on a property to recover the debts owed to them by the borrower. When the lender forecloses they repossess the property so they can resell it.

This process usually takes a lot of time. The homeowner still owns their property however until the public auction takes place to sell it. Any time before the public auction takes place a pre-foreclosure sale can happen. The investor does the following:

1. The investor first invests in the property by buying the property from the seller at a discount, usually below market value. This works if the owner has equity.
2. The investor can take over and make up all the back payments. This stops the foreclosure in a “subject to” arrangement”.
3. Trying to invest in a short sale where the lender agrees to take a lesser amount to sell the property than what is currently owed.

Short sales are often a great way to buy a pre-foreclosure home and make a handsome investment when you can negotiate with a bank and purchase a home for less than the loan amount. This tends to work out for both the investor and homeowner, and eventually for the original lender too if you can convince them to see this in your favor.

Many lenders may initially oppose such maneuvers but seeing the housing market decline will often encourage lenders to seek out a compromise or discount purchase rather than lose a lot of money in a lengthy foreclosure. This is really a win-win situation for all parties involved.

A foreclosure simply means that a mortgage has been defaulted upon and the lender is attempting to recoup their money through seizure of the property. While there are definitely some heartbreaking tales associated with foreclosures the fact remains that a foreclosure – much like the initial home purchase – is a business transaction. Banks simply can not lend out money that is not going to be paid back. As such, the inclusion of a buyer of the foreclosed upon property is simply another link in the chain of these business transaction. If the person buying has not been involved in any unethical dealings associated with the foreclosure of the property then the buyer is not doing anything wrong. As a matter of fact, the buyer may even prove helpful as the influx of sales cash can be used to pay off a large part of the remaining mortgage. So, do not let public sentiment designed to sway emotions towards a federal bailout put you on a guilt trip.

Public REITS – Public REITS refer to those investment trusts that are offered publicly on the stock exchange. These REITS can be purchased and sold at the will of the investor. They are generally not considered high risk investments although high risk versions surely exist. Also, most of the returns on such REITS are modest as will any low risk investment.

Private REITS – Private REITS are not offered as public stock and are essentially the equivalent of investing in a business. These REITS are generally aggressive with potential high risks, but the payoffs on a private REIT have the potential to be significant. Please note that when one purchases a private investment the stock can not be sold! Instead, the duration of the term of the REIT is specified (say 7 years) and then dividends are paid out (hopefully) over the course of those 7 years with the intention of recouping the initial investment and then exceeding it as a competitive interest rate. If the REIT turns out to be a lemon, however, there is no way out of it. So, please understand these complexities before getting involved.

For those not familiar with what a REIT entails, probably the best description of it would be sort of mutual fund that invests in properties. That is, the REIT will involve a multitude of properties and interest will be paid on the success of these ventures. The way in which money is earned on a REIT involves the purchase and sale and/or management of property, and rental income (equity REIT); the lending of money for real estate purposes (mortgage REIT); or a combination (hybrid REIT). So, instead of venturing out into these investment options on your own you can invest in a collected managed portfolio of these ventures in the form of a REIT. Again, this is no different than a mutual find and comes with relatively low risk and low initial capital investment. Of course, you could also invest big as well as seek aggressive and volatile REITs as the choice is up to the investor.

Case in point, if a the property deemed to be “flipped” turns out to require more repair work than what was previously expected or if there are other issues to contend with such as declining real estate value then the property might even turn out to be a money loser for the investor. Granted, tax write offs may make the venture salvageable but this was not the original intention. If there was any advice that could be offered here it would be approach flipping a property conservatively and not try and make a “killing” by attempting to flip a large volume of property. Start slow, take it easy and then let business develop from there.

If you think this is an idealized description of the situation, then look at it this way: say the average market value of a similar home in the area is $250,000. The home you are considering purchasing is valued at $190,000 due to extensive repair work that is required. So, before making a decision as to whether or not this home is a viable investment purchase it may be wise to examine what the cost of the repairs will be. If the repair work will cost $30,000 then this is not a negative…it is a huge positive! If you do not believe so then simply do the math: $190k plus $30k equals $220K. Remember, the value of the home after repairs will be in the neighborhood of $250K. So, even with $30k in repair work you will end up with acquiring the home at a $30k discount! This is to say nothing of the equity appreciation the home will eventually accrue.

Of course, no one wants to purchase a home that is falling apart, but if the required repairs can be overcome by the equity one can acquire then this is far from a bad real estate investment venture.