| We have all seen the late night infomercials featuring | | | | found to be substantially less than the value of other |
| the guy who bought a foreclosure for $40,000 and | | | | similar property. The average price appreciation rate |
| sold it a week later for $75,000. These stories can | | | | for foreclosed properties was 22 percentage points |
| certainly get people excited. Considering the costs | | | | lower than for typical homes. |
| involved and the associated risks, can you really make | | | | The study also found that while foreclosed properties |
| money buying foreclosures? | | | | are responsive to local area house prices, they do not |
| Let's take a closer look at buying foreclosures. | | | | capture all of the area wide appreciation. In addition, |
| There's no doubt that this can be done, but it can be | | | | when local area house prices are dropping, the |
| very challenging. As the housing market cools in many | | | | discount increased. Borrowers who are identified at |
| parts of the country and as nearly a trillion dollars in | | | | application as higher risks also tend to own homes that |
| adjustable rate mortgages reset themselves, now | | | | sell at an even higher discount than typical foreclosed |
| may indeed be a great time to get started buying | | | | property. |
| foreclosures. | | | | State level foreclosure laws can also have impacts on |
| But before you start getting greedy, let's consider the | | | | the appreciation of foreclosed property. For instance, if |
| specifics. There are many ways you can go about | | | | a loan is foreclosed in a state that allows the borrower |
| buying foreclosures. You can deal directly with | | | | the right to redeem the property after paying the |
| homeowners in delinquency, you can go to auctions, or | | | | foreclosure expenses for up to a year after the |
| you can work the short sale market (when a bank | | | | foreclosure date, the discount increases. But the |
| accepts a discounted or a lower payoff than the | | | | impact of buying foreclosures is different for each |
| actual mortgage balance as payment in full). Each | | | | type of law. For instance, if a state requires that the |
| process has its own advantages and risks. Whatever | | | | foreclosure proceed through the judicial system - the |
| approach you decide on, educate yourself about the | | | | discount also increases, but the discount is smaller in |
| property and don't overpay. You make your money in | | | | states that allow the lender to recoup any losses from |
| real estate on the buy. | | | | other assets beyond just housing. |
| There is no doubt that discounts can sometimes be | | | | Well this sounds great, but what does all this mean to |
| substantial, but competition for deals can often be | | | | the investor who is considering buying foreclosures? |
| fierce. You may need to sort through dozens of | | | | The simple fact is that if a borrower is in default, it |
| potential deals to find one that makes economic sense. | | | | indicates that the property will generally be sold at a |
| And just when you think you have the perfect deal, | | | | discount relative to similar properties. In addition, |
| the costs to rehab the property is far greater than | | | | foreclosed properties tend to follow the movement of |
| expected. In addition, in today's environment, lenders | | | | house prices in the area, but in a muted fashion. |
| are more flexible than they were many years back. | | | | Investors who understand the risks associated with |
| Many of them believe that it's better to offer some | | | | buying foreclosures can certainly exploit the |
| leniency to a troubled borrower rather than to take | | | | opportunities in the current market. However, with a |
| back a property. | | | | soft market in many parts of the U.S., it will be a |
| But the question still remains - is buying foreclosures a | | | | challenge to find a property with enough equity. In fact, |
| good way to make money? | | | | many foreclosures have no equity at all. |
| Well let's consider a study conducted by the Office of | | | | So before you take the plunge, realize that making |
| Federal Housing Enterprise & Oversight on buying | | | | money buying foreclosures is not a simple process. |
| foreclosures. The study attempted to answer this very | | | | Assuming you have the time and the temperament, |
| question. | | | | there is money to be made. It certainly is not as easy |
| Using data on over 12,000 foreclosed single-family | | | | as the infomercials would have you believe. |
| property sales, the value of foreclosed property was | | | | |