Distressed Properties: Making Money with Foreclosure, Short Sale and Bank Owned Homes

Distressed properties refer to foreclosure, short sale and bank owned real estate. Many investors seek out these types of properties because they can be purchased below market value. In today's market distressed real estate can be an investor's dream. However, careful consideration should be given before making an offer. Otherwise, these properties could quickly become an investor's worst nightmare.

Real estate experts proclaim distressed properties could quickly become the next hot investment opportunity. They also warn this type of real estate investment will not create overnight wealth. Instead, buying fixer-upper homes is primarily for investors who prefer slow and steady growth or those who participate in house flipping.

The key to success in this real estate niche is to locate properties that are located in areas where people want to live. With a little work and various upgrades, distressed properties can be used as rental homes, sold as rent-to-own property, or quickly flipped for profit.

Investors who prefer long-term tenants should seek out distressed properties located in family communities. Investors who prefer short-term tenants should look for foreclosure, short sale or bank owned homes located in areas where people enjoy vacationing. The right home located in popular vacation destinations can potentially yield higher profits than long-term housing rentals. Only you can decide if you prefer long- or short-term rental properties.

It is crucial to engage in due diligence prior to investing in distressed properties. Obtain repair estimates through contractors. Determine if any unpaid tax or creditor liens are attached to the property. More important, make certain you can afford the mortgage payment if unable to rent or flip the home.

Foreclosure homes tend to be a riskier investment than bank owned houses. On rare occasions, investors are fortunate enough to locate foreclosure homes in nearly perfect condition. However, most distressed properties require substantial work to return the home to livable condition.

Foreclosure real estate is purchased through public auction. Investors must be capable of obtaining financing if their bid is accepted. In some cases, the previous homeowner continues to reside in the home and investors must engage in eviction. If you do not want to deal with these types of problems, it is better to invest in bank owned properties instead.

If no acceptable bids are placed on foreclosure homes, the properties are returned to the originating mortgage lender. The bank eliminates the mortgage and negotiates with creditors to remove liens. Banks also take care of eviction. Mortgage lenders aren't notorious for 'giving away the bank', so be prepared to engage in multiple counter-offers to obtain the desired price.

A more profitable and less stressful way to purchase bank owned properties is to seek out real estate investors who purchase bank portfolios. Investors who purchase entire portfolios are able to buy distressed properties at wholesale prices. They then pass along a percentage of savings to other investors; creating a win-win situation for all parties involved.

It is not uncommon to purchase bank owned homes through private real estate investors for 60- to 70-cents on the dollar. Even when investors must spend 10- to 15-percent in repairs, they still have accrued equity in the home. In order to triple or quadruple profit margins, real estate experts suggest holding the property for ten years.

There is money to be made by investing in distressed properties, but it is rarely easy or quick. By taking time to make informed decisions, investing in bank owned,  foreclosure and short sale homes can eventually make investors quite wealthy.