Foreclosed Real Estate: Do Distressed Properties Make For Smart Investments?

Foreclosed real estate can be one of the smartest investment decisions you'll ever make. However, it's not quite as easy as the late-night infomercials suggest. Before plunking down your hard earned cash you should educate yourself about the pros and cons of investing in distressed properties. The following tips can help you understand the facts and be prepared for what lies ahead.

When real estate is foreclosed it must first be placed for sale through a foreclosure auction. In order to buy auction property, individuals are required to place a minimum bid equal to the balance due on the mortgage note, along with any accrued interest, tax or creditor liens, attorney fees and other costs associated with the foreclosure process.

In many instances, more money is owed on the home than it is worth. It is rare to find foreclosed real estate that does not have liens attached. Occasionally, the foreclosed homeowner still resides in the home. The liens must be removed and the homeowner evicted before you can take possession of the home. This can be a tedious and sometimes volatile process. Therefore, it's critical to engage in due diligence prior to making an offer on foreclosed real estate sold through auctions.

When foreclosed properties are not sold through auction, they are given back to the bank. At this point, property is referred to as "real estate owned" (REO) or "bank foreclosures." Once the bank retains ownership of the real estate, the mortgage note no longer exists. Oftentimes, the bank negotiates with lien holders to reduce or remove liens attached to the property. The bank will evict persons residing in the foreclosed property, if necessary and may invest in repairs and renovations.

Bank owned real estate may or may not be a smart investment. Engage in due diligence and thoroughly investigate the property prior to making an offer. Start by conducting market research to ensure the price you pay is comparable to other homes in the area. The goal is to purchase REO properties significantly under market value.

When viewing distressed properties take along a note pad, digital or video camera and make note of necessary repairs. Most foreclosed real estate is sold "as is" and this can work in your favor. The more required repairs, the more negotiating power you possess.

Obtain estimates to determine the costs of repairs and renovations. If you plan to do the work yourself, determine the length of time it will take to complete the repairs, along with the cost of materials. Factor the cost of your time and materials into your offer. Just because you conduct the work yourself does not mean you should not include the cost of your time in the proposal.

If you are the handyman type and able to make repairs yourself, investing in distressed properties can be quite profitable. However, if you have to hire contractors to conduct the work for you, it can seriously cut into your profit margin.

Real estate owned foreclosures are purchased directly from the bank. Keep in mind that banks want to obtain the best price possible and keep losses to a minimum. Generally, banks have a Loss Mitigation Department who handles REO properties. Many banks list their foreclosed real estate on their company website. The name and contact information for the loss mitigator is usually posted with the property description.

A lesser known, but more profitable way to invest in foreclosed real estate is to locate private investors who purchase bank portfolios. By purchasing distressed properties in bulk, investors buy at wholesale prices. They then pass along their savings to individuals who purchase the property. Whether for personal residence or investment purposes, it is not uncommon to buy foreclosed homes from investors for 70- to 80-cents on the dollar.

Regardless of the method you choose, foreclosed real estate can be risky. However, if you take time to understand the process and conduct due diligence, you can make a tidy profit by investing in distressed properties.