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Distressed Properties: The Truth About Investing in Foreclosure and REO Houses

Distressed properties are a real estate investor's dream, but are they profitable as many people claim? According to experts, the answer is a resounding "Yes!" -- if you know the tricks of the trade.

Investing in distressed properties such as foreclosure and real estate owned (REO) houses can pave the way to profits. However, experts warn investing in these types of homes will not create overnight wealth. Instead, investing in foreclosed homes is better suited for investors who prefer slow and steady portfolio growth or those who engage in house flipping.

The most important aspect of investing in foreclosed or bank owned property is to locate houses in an area affordable enough to cover the mortgage payment with rental income. Many investors prefer renting houses on a long-term basis. However, another solution is to offer the home as a vacation rental on a short-term basis.

Those who prefer long-term tenants should seek out properties in family-oriented communities or areas that cater to individuals over 55 years of age. Those who prefer short-term tenants should seek out distressed properties which can easily be converted into a vacation rental. The right home in a popular vacation destination can potentially yield a higher return than long-term housing rentals. Only you can decide if you prefer long or short-term tenants.

Prior to investing in distressed real estate it is imperative to engage in due diligence. Gather estimates for repairs and renovations. Make certain there are no tax or creditor liens attached to the property. Most importantly, ensure you can afford the mortgage payment in the event you are unable to rent the property.

In general, investing in foreclosure properties carries a higher risk than investing in REO properties. In order to buy foreclosure homes, investors are required to bid on the property through auction. The bid must be sufficient to cover the balance due on the mortgage note and any outstanding debts attached to it.

Another important consideration is that when purchasing foreclosure homes, there might be instances where the investor will be required to evict the previous homeowner. If you would rather not deal with these types of issues, consider investing in REO properties instead.

Real estate owned properties are houses which do not sell at foreclosure auctions. When houses are returned to the bank, the mortgage is eliminated and the bank negotiates with creditors to remove or reduce liens. When necessary, they will also take care of eviction.

Purchasing REO properties directly from the bank can be a lengthy process. Currently, most banks require bids start at a minimum of ninety five cents on the dollar. If the mortgage note balance is $100k, the opening bid must be a minimum of $95k. Keep in mind, banks rarely accept the first offer and two or more counter-offers are usually required before a deal can be struck.

A little known secret to invest in distressed REO properties is to buy from private investors who purchase bank portfolios in bulk. This allows the investor to buy properties well below market value and pass their savings along to other investors.

It's not uncommon to purchase bank owned properties from a private investor and obtain an instant 25- to 30-percent equity in the home. Even if you need to invest 10-percent of the purchase price into repairs and renovations, you still have a decent portfolio profit.

Experts recommend holding on to distressed property investments for a minimum of ten years. Following this strategy, they suggest you can triple or quadruple your investment.

While there is money to be made by investing in distressed properties, it generally is not easy or quick. However, if you take time to make informed decisions, investing in foreclosures and REO houses can lead to the pot of gold at the end of the rainbow.

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Published on April 10, 2008 at 09:29 PM

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