Risky Business? The Pros and Cons of Foreclosure Investing

(Photo by Christopher Furlong/Getty Images)

(Photo by Christopher Furlong/Getty Images)

The mortgage foreclosure process creates three sets of real estate investing opportunities: the “Default/Pre-Foreclosure” phase, the “Auction/Sale” phase and the “REO” phase.

Investing in foreclosures can provide excellent profits. Each of the three foreclosure opportunities presents both rewards and certain risks, so be sure to do your homework before you buy.

Buying Pre-Foreclosure Real Estate

Buying pre-foreclosures involves working directly with the homeowner and sometimes the lender. Your goal is to create a win-win scenario. One win is for the homeowners (they make a sale) and one win is for yourself (you buy the property at a substantial discount).

To accomplish a successful pre-foreclosure purchase, most experts recommend the following steps:

  1. Locate loans in default
  2. Evaluate and narrow selections to pursue
  3. Inspect the real estate property
  4. Evaluate the property owner’s needs
  5. Determine the market value of the property, fix-up costs, potential sales price and profits
  6. Arrange default work by negotiating with the owner and the lender
  7. Close on the property, repair and resell it quickly