Foreclosure Investing Essentials

The term "foreclosure" rarely has any positive feelings associated with it. And for good reason: foreclosures are always connected with times of financial difficulty. But for the real estate investor, foreclosure investing represents an opportunity to increase his or her profits while helping someone out of a tough spot at the same time.

What is a foreclosure?

A foreclosure refers to the process of reclaiming mortgaged property by the lender. Almost everyone must borrow some amount of money to purchase a home. The amount varies, but most lenders finance from 80 to 100 percent of the total cost of the property. The loan is called a mortgage, and the home buyer repays the mortgage over time. The total term of the loan can vary, but most buyers make monthly payments for a total of 15, 20 or even 30 years.

Sometimes a situation may arise in which the home buyer can no longer make monthly payments on time. This may be due to unexpected medical expenses, the loss of a job, or poor financial planning. It's usually in the best interest of the lender to continue the loan, but if the buyer misses too many payments and has no visible resources for getting current, the lender may be forced to begin the foreclosure process.

Foreclosures are possible because the property serves are collateral for the loan. In the mortgage agreement, both parties have agreed to certain conditions, including the return of the house to the lender when required payments aren't made.

What's the benefit of foreclosure investing?

Foreclosures are particularly attractive to real estate investors. Foreclosure investing lets you buy properties at bargain basement prices. The time and money you invest in foreclosure properties almost always have greater returns than normal real estate investing.

Foreclosure investing tends to have less competition. Foreclosure takes some extra work to locate, especially in the weeks before it actually goes up for public auction. If you're willing to do the research, you'll be able to find these below-market-price homes and face very little competition.

How can I profit from foreclosure investing?

There are at least three ways to profit from foreclosure investing. First, you may choose to keep the home after you purchase it. Buying a foreclosure usually gives you a large instant equity that you can borrow against for future real estate investments. Or, you may choose to rent out the home and provide yourself with a monthly income.

Another way to profit from foreclosure investing is to flip the foreclosure. Many foreclosures may need only a cosmetic makeover to really enhance their curb appeal. Then you can resell the property at full market value and pocket a tidy profit.

Foreclosure investing has the potential for higher profits than everyday real estate investing. Plus, if you can close the deal before the house goes up for public auction, you'll be providing real help for someone in a desperate financial situation. Foreclosure investing takes more research and follow-up, but the rewards are well worth it.