An excess of foreclosure property could be the yellow brick road to the pot of gold for savvy real estate investors. A recent report published at CNNMoney.com deems investors who sweep in to purchase distressed properties as 'vulture investors', but in reality these individuals have learned how to capitalize on a downturned market.
Foreclosure property can consist of single- or multi-family residences, commercial real estate, or raw land. Previously, investors purchased foreclosure real estate primarily for the purpose of house flipping. Today, these properties are being purchased as rental homes to accommodate the millions of homeowners who lost their home to foreclosure and incapable of qualifying for mortgage loan.
There are two ways to buy foreclosed homes. The first is through public foreclosure auctions. When banks repossess real estate it is listed for sale through auctions. If the property owner can cure mortgage arrears prior to the foreclosure auction, the property can be pulled from the sale.
The cost of auction real estate is based on the outstanding balance of the note. Since property values have declined dramatically in many states, borrowers often owe more than the home is worth. Buyers are responsible for removing tax liens or creditor judgments before they can obtain a clear title and transfer the property deed.
If no one bids on foreclosure real estate offered at auctions the property is returned to the lender. At this point, it is referred to a real estate owned (REO) or bank owned property. Once banks take possession of the property they remove liens and judgments in order to sell the home with a clean title.
REO properties are usually priced higher than properties sold through auction. However, since liens and judgments are removed, buyers can easily transfer real estate deeds and begin earning a return on their investment.
Individuals can also purchase REO properties from mortgage lenders. Bank foreclosure sales are handled through each lender's loss mitigation division. Some banks work with local realtors to list foreclosure properties and manage sale transactions.
Depending on the location of foreclosed real estate, buyers can purchase distressed properties anywhere from 10- to 50-percent below market value. Buyers should anticipate paying the full asking price because banks have already incurred losses from the foreclosure process, lien and judgment removal.
Buyers of foreclosure property must engage in due diligence to ensure they are making a smart financial investment. Many foreclosure homes require substantial repairs that can quickly deplete profit margins.
Real estate sold through foreclosure auction and bank loss mitigation are sold in as-is condition. Therefore, buyers should obtain comparable sales reports for other homes recently sold in the area, along with real estate appraisals and property inspections.
Investing in foreclosure property is not without risk. The current real estate market is on shaky ground and no one knows with certainty how long it will be before prices rebound. Buyers and investors should be prepared to hold real estate for several years in order to obtain a good return on investment.
We encourage you to browse our comprehensive foreclosure property article library to learn about the different types of properties; understand how the foreclosure process works; and discover insider-secrets for obtaining the best prices when buying distressed real estate. We publish new real estate articles weekly, so take a moment to subscribe to our mailing list and stay abreast of the constant changes occurring within the foreclosure real estate market.
Published on August 23, 2010 at 02:32 AM