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Are Foreclosure Investments Worth It?

Updated on January 27, 2010

With more foreclosures than ever on the housing market today, many are turning to foreclosure investment to boost their financial situation in light of financial portfolios that are losing money. However, is a foreclosure investment worth making for you? The answer depends on how much real estate investment experience you have. 

If you are new to real estate investing, foreclosure investment can be a very risky business. While investing foreclosures offers the opportunity to make very large profits, the process is complicated and one misstep can permanently damage your capital and push you out of real estate investing permanently.

Methods and Risks of Buying Foreclosures

There are three methods of investing in foreclosures. You can buy a home from the owners before its official foreclosure, purchase it at auction, or buy it from the lender after the auction if no one purchases it during the auction (called buying Real Estate Owned, or REO).

Purchasing a property REO is the least risky of all foreclosure investments because the transaction is similar to a traditional transaction. Buying pre-foreclosure can be risky because the seller may be so eager to sell that he may hide facts about the property from you, not disclose liens on the property, misrepresent the neighborhood, or practice other deceptions. Unpaid utility bills and property taxes also become your responsibility if you buy pre-foreclosure. Additionally, if the seller filed bankruptcy, he does not have the authority to sell the property to you at all.

Buying foreclosures at auction is extremely risky because you have no access to real estate agents to assist you in the process. Without escrow, a title report, insurance, warranties, or a professional to verify the legitimacy of the sale, there are a lot of dark areas you may not see until you inspect the house after the fact. You also don’t have the benefit of inspections upon the property to ensure that it is sound. Also, auction sales are usually all cash, and you make a down payment and have a limited amount of time (a month, usually) to raise the remaining funds. If you don’t, you will lose your down payment.

If you are an experienced real estate investor, foreclosure investments can be lucrative for you. Research the area you’re looking to invest in. Learn your local and state laws. Network with other real estate investors to gain from their experiences. However, be very cautious to invest in foreclosure real estate if you don’t have much experience.

Image Credit: taberandrew, Flickr

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