Foreclosure Real Estate Investing Trap

Have you noticed all the foreclosure investor training ads that have flooded the market lately?

Some would say that teaching people to invest is the best way to make money in distressed real estate market? Maybe, but I think the number one lesson to be learned is not to get tempted into losing money by buying foreclosure "bargains".

Here's the question every real estate investor must ask themselves, "Is this the time to be buying real estate?"

I believe this is a very dangerous time for real estate investors. I feel the "bailout economy" is setting a trap for many investors and let me explain why.

Home prices continue to fall, at least that the case in many areas. All real estate, like politics, is local, so price trends can vary greatly from one geographic area to another, but let me give you an example of what I mean.

Look what's happening in Phoenix, Arizona. The year over year home price decline June 2007 to June 2008 was 23.3%. From July 2007 to July 2008 the decline in home prices was 25.6%. Any way you look at it that's a very unprofitable downtrend and home values continue going down. Phoenix has never experienced such a prolonged drop in home values.

I admit that Phoenix is not an average real estate market. Prices shot up to extremes unmatched by most other cities, so now they have farther to fall. The decline of home values in your area might not be as dramatic, but chances are it is still down.

Now you're asking, "Is the bottom near?" The new chief executives of Fannie Mae and Freddie Mac have only been in position a few months, but after taking a close look at insider information they are forecasting that it will take years for real estate to recover in some cities. Federal Reserve Chairman Ben S. Bernanke made a similar comment about the entire U.S. economy and not just real estate.

What about the bailout and the billions of dollars the crowd in Washington is throwing at the economy. Yes, a few of those dollars are aimed at helping communities cope with the foreclosure situation. Have you ever tried to put out a fire with a shot glass full of water? That's about the effectiveness of the few bailout dollars available to cities.

The Housing and Economic recover Act of 2008 allocated $3.92 billion to assist stricken neighborhoods. Let's see how that money will help Mesa, Arizona, with a population just under 400,000 and a median income of $53, 300.

The City of Mesa and a collection of the city's non-profit agencies have to decide how to spend $3.92 million. At the end of September, 2008, about 2,300 properties city wide were in various stages of foreclosure. The money from Washington can be used to buy and rehabilitate properties and resell or lease them. Some homes could be demolished and rebuilt. The money cannot be used to stop a foreclosure.

Mesa's housing director says that with the money about 50 properties can be rehabilitated, so it's plain to see that the bailout money is not going to halt the slide in home values.

The trap is ready to spring on those who buy real estate before there is an end to falling prices. What seems like a bargain today very well may look like a terrible buy six months from now.

The U.S. economy is much worse than most people think and the folks in charge don't see a turn around anytime soon. Investors should exercise a great deal of caution. There will be plenty of great buys after we've passed through the bottom of this housing crisis.

Just remember that we won't be able to identify the bottom until after it has passed.