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Foreclosure Investing - Risks vs. Rewards

There’s a kind of urban myth going around that you can go out buying foreclosures at 60% off the market value, change the locks, drive a “for sale” sign into the front lawn, and sell them in two weeks for a huge profit. That’s hardly ever how it works in the real world.  There is a fair amount of foreclosure home buying risk involved, so let’s see what’s at play:

  • Know the market value.  The serious players will usually have rental properties or other houses that are within 5% or so of the market value for the area.  If you don’t, then look thoroughly into the MLS listings and title company comps to get a good idea.  If you buy too high and have to sell too low, your foreclosure investing isn’t going to carry a good reward.
  • Know the law.  Find out what the particulars are for your state; what rights the homeowner has and what the bank’s prerogatives are.  Some states have a Deed of Trust, others have mortgages, and it can get complicated quickly.  Don’t let your experience in buying foreclosures turn into a legal headache.
  • Know your money.  Like the old cliché says, “it takes money to make money.”  You’re going to need sizable reserves not just to make a purchase happen, but to cover office-type expenses and everything else.  If you don’t have them on hand, line up backers of your own.
  • Know the details.  The details are what can make a good deal go south. Unpaid interest, wrong property descriptions, wrong property information, and tax leans can throw a monkey wrench into the works.  And remember that to research all details, you may need even more money.
  • Know the property.  Remember that a foreclosed house that’s been on the market for awhile may be overpriced, ugly, out-of-style or may have structural or other problems.  Keep rehab costs in mind if you want to pursue this kind of foreclosure investing.

Also bear in mind that you’re not the only one in the game; there are lots of investors out there going after the same properties, many with more resources than you.  That being said, if you go in fully aware of your risks and are willing to put in some legwork and diligence, there are some great deals that can be found in buying foreclosures for investments.