Investing in Foreclosed Properties
There are a lot of people looking to make money in real estate -- quickly and with no money down. Real estate foreclosures are said to be an instant success. Are they?
Foreclosure properties have the potential to be a good place to invest for exponential growth or loss. There are some situations out there for little or no money down, but you should take some precautions because foreclosed properties come with significant risks.
There are many ways you can invest in foreclosed properties. The most popular way is to purchase a property, fix it up and rent it out, creating a positive monthly cash flow. The investor becomes a landlord, and assumes the responsibility of an investment property owner.
The second way to make money is to seek out foreclosures or fixer-uppers, buy them, invest in repairs and remodels and then sell them at a profit.
The third way is to buy a nice foreclosure that is underpriced and sell it immediately at a higher value. This often comes through selling at a higher value through a take back. For example, you buy a $100,000 house at a foreclosure for $50,000. You pay 10% down and create a new mortgage for $45,000. You then turn and sell the property for $80,000 with 100% seller financing.
Underpricing the house pulls in a buyer quickly. By taking a promissory note for $80,000, you have now created a $35,000 note for yourself. The buyer pays you on the $80,000 and you pay on the original $45,000 note.
If you are paying 8% interest on a 30 year mortgage, and the buyer is paying you 9.5% on a 30 year mortgage, you will be making around $306 a month. If the borrower stays in the house for 30 years, you will make $88,295 in interest and $30,000 in capital gains after paying the interest on the first note. And all you originally spent was a $5,000 down payment.
The downside is that not all mortgages allow an owner to do this. Most loans today contain a "due-on-sale" clause, meaning that if you sell the property, you must pay off the mortgage immediately.
But before you start out on any real estate investment adventure, here is some advice.
Make sure that your spouse or other investors understands exactly what will and could happen. You are entering a life of property management. Calls in the night from tenants and other risks are commonplace.
You should take the time to become well educated. Don't just read one column and decide this is the time to start bidding on properties. There are plenty of real estate agents who would be happy to talk with you about the world of foreclosure properties. There are many books that will help you learn the intricacies of investing.
You have to realize that not all foreclosures are good deals. Not all foreclosed properties sell for undervalue. A buyer can always default on owner-financing. Most loans today don't allow you to sell a home without paying off the loan. You will face repair cost, tenants who don't pay their rent, damaged property, changing interest rates and taxes.
If making money of foreclosures was easy and a sure bet every time, everyone would sink their retirements in it. But it isn't easy. Remember that it is a gamble. Don't worry, there will always be another foreclosure. Take your time and really research what you plan to do. With high sales prices on homes, we'll be seeing more foreclosures up for auction in the future.
About the Author
Martin Lukac, represents http://www.RateEmpire.com, a finance web-company specializing in real estate/mortgage market. We specialize in daily updates, rate predictions, mortgage rates and more. Find low home loan mortgage interest rates from hundreds of mortgage companies! Visit http://www.RateEmpire.com today.