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Profiting From Foreclosure

20 August 2010 3 Comments

This is a guest post submitted by Kathleen Mackenzie

Whether you are looking to purchase a family home or considering snapping up some property as a form of investment, there are plenty of reasons why buying a foreclosed property is a sound plan. Certainly there are a few hurdles. For starters, it’s not the best time to be trying for a loan as mortgage lenders have significantly tightened the purse strings since the market went into freefall. And for first-time homebuyers who thought they could count on assistance from the federal government, that ship has unfortunately sailed (although some states may still be offering financial aid to bolster the market). Then there are tales of new developments that are blocking investors from buying, and opting instead to sell to individuals (whom they apparently feel are less of a risk for default). In addition, most foreclosures are sold on an “as is” basis. Banks are not going to spend any money to fix a place up for sale, and there will be no recourse if something goes wrong in the future. So no matter what your purpose in entering escrow, you may have to overcome a few challenges along the way. However, if you can work your way through to signing on the dotted line, you stand to gain a lot from buying a home in foreclosure.

First-time homebuyers, in particular, are well positioned for a number of reasons. Consider yourself lucky that you don’t currently have the dead weight of another house hanging around your neck. You won’t have to face the hassle of trying to sell a home before you can purchase another. Plus, most homeowners who are trying to sell now in order to avoid foreclosure will almost certainly lose money. It is a buyer’s market and you stand only to gain (albeit from the misfortune of others). However, if your credit is good, you have saved a down payment, and you can afford the monthly mortgage, there is no reason you can’t take advantage of the low, low prices on the foreclosed homes that have flooded the market. You should have no problem finding a great house within your price range and if you can hang onto it until the market rebounds, you stand to enjoy a significant return when you decide to sell.

As for investors, the ability to capitalize on a market that is chock-full of foreclosures is a bit more dicey, but not impossible. The real trouble is that flipping is almost entirely out of the question, so you’re going to have to make sure you’re positioned to sit on the property for awhile. This brings up the issue of cash flow, which is basically the amount of money coming in versus the amount of money going out. Of course, all investors prefer a positive cash flow situation, so in the real estate arena, areas with lower-priced homes are going to offer the best bet for investment. You don’t want to be buying million-dollar homes that you can’t sell and will be hard-pressed to secure the kind of rent required to cover the mortgage. Instead, consider spreading your seed money around to several less expensive properties, fixing them up a bit, and charging enough rent to cover not only the monthly mortgage payments, but also pay for a property management firm (unless you plan to collect rent and send out plumbers on your own time), and maybe a bit extra for insurance, property tax, etc. (if you can swing it). That way you are basically losing nothing and you stand to come out pretty far ahead when the real estate market rebounds.

Kathleen Mackenzie is a writer for Tampa Homes 24-7, which specializes in Riverview Real Estate.


  • exchangerates said:

    I do agree it’s sad that these homeowners are losing their homes. I was reduced to part-time work and had to struggle to make rent. At the same time, purchasing investment property is what some investors rely on for their livelihood as well. And there are some investors that use their profession to help others less fortunate, by purchasing and renting so the family can remain in their home. It’s not a great situation we’re in, but everyone is making do with what they can.

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