Profiting from foreclosures is not just a matter of looking for foreclosed properties and buying them. You need to know the strategies and methods you can use to ensure that you get a return on your investment. If you are not careful, you could find all kinds of traps that could affect your profits or even eliminate them.
So what are the possible ways to profit from foreclosures?
- One way, of course, is to find and invest in previous foreclosures. This means placing a home in the default phase of foreclosure, where the foreclosure sale has not yet taken place. Why is this profitable? One of the fundamental principles of real estate investment is to find motivated sellers – and sellers don’t come much more motivated than pre-foreclosure ones. They are usually desperate to find a way out of their situation and you can offer it to them. Lenders can often be persuaded to deduct what is owed on your settlement in order to avoid having to repossess the property. So you can negotiate for more equity, plus you can make an offer subject to being able to take over the financing that already exists. This can be a win-win deal for you and the owner.
- Another way to cash in on foreclosures, often sought after by first-timers, is to invest in foreclosed properties that need repair, fix them up, and sell them for a substantial profit. The drawback to this is that if you buy a foreclosed property at auction, you have little or no opportunity to inspect the property to see exactly what repairs are needed. You may think you got a good deal but then find out the cost of repairs is higher than you expected. Also, the later the repair, the more costs like mortgage and insurance payments will affect your bottom line. Therefore, you must be very careful if you want to adopt this method.
- A very popular way to profit from foreclosures is to invest. This means buying and selling very quickly at a smaller profit, without making any repairs. The best way to do this, if you can handle it, is to have your buyer instead prior to you buy the property, so you know exactly how much you can sell it for. You must be prepared to sell the property for less than it is worth so that there is still some profit potential left for the next buyer. The advantage of changing quickly from your point of view is that although the profit on an individual property will be less, you can repeat this several times in the time it would take you to remodel a property, so your total profit at the end of the year will be at less as much and probably more. But it’s not for the novice investor – you need a lot of skill to identify the right properties and line up your sale at the right time.
- Finally, there is the possibility of profiting from foreclosures by purchasing REO (real estate) homes that have reverted to the lender. But you have to be realistic. An REO home in good condition will likely sell at or near its market value. However, some REO properties are in mediocre or poor condition, and you can sometimes beat the bank because of their reluctance to keep the property. The profit on these can be in the 15-20 percent range, and the advantage over buying at auction is that you can inspect before you buy, plus there are no title concerns.
If you’re interested in profiting from foreclosures, it’s critical that you not be naive, unrealistic, or greedy. It’s a business, not a get-rich-quick scheme, and you need to know what you’re doing before you start. Even outbidding on a single property, as many first-timers do, can lead to financial ruin instead of making your fortune. But do it right and you’ll feel much better.