Foreclosure Investing: What Is It And How Does It Work?

By: Hunter Craig

With the housing market in a downturn and hundreds, if not thousands, of homes going into foreclosure, people are beginning to talk more about and pursue foreclosure investing. But, what is it and how does it work? Well, for answers to your questions on foreclosure investing, keep reading.

What is foreclosure?

Foreclosure is a process that is initiated when a homeowner is not able to pay the mortgage on their property or sell the home quickly or efficiently enough. The financial burden is no longer manageable and the house then becomes the property of the lender or bank. Typically, the property is later sold at a below-market prices in order to settle the outstanding debt.

So, what is foreclosure investing?

The term "foreclosure investing" refers to the practice of buying houses that have gone into or are about to go into foreclosure and then selling them on the traditional real estate market. Typically, these homes are sold at auction or at a reduced price, meaning investors can purchase homes for less than their normal value and then - after doing some repairs and sprucing up - resell the homes for a profit.

What is pre-foreclosure investing?

Pre-foreclosure investing is the practice of buying a property before it's actually foreclosed on, but after the homeowner has gone delinquent on their payments. In this case, the home is purchased from the owner who can at least make enough on the sale to cover a lot of the owed mortgage debt.

The appeal of pre-foreclosure investing is that the homeowner does not have to go through the process of foreclosure, and the buyer or investor is typically able to obtain the property for less than market value since the seller is highly motivated.

Is foreclosure investing legal?

Yes, foreclosure investing is legal and done by many reputable investors and real estate professionals. Unfortunately, there are some unethical individuals and businesses who prey on homeowners in trouble, claiming they can save them from foreclosure while simultaneously stealing their homes. This practice, however, is considered fraud and is illegal.

Does foreclosure investing work?

That depends on what kind of profitable returns you're looking for and how fast you want to turn your property around to sell it. Typically, the longer a property appreciates, the greater your return will be. On the other hand, the longer a property appreciates, the greater your carrying costs will be. By carrying costs, we mean the expenses associated with ongoing mortgage payments, taxes, and maintenance.

Also, depending on the location you're purchasing in and the current real estate market in the area, you may have a hard time selling or making the kind of profit you might otherwise anticipate.

I've heard about foreclosure investing clubs - are they a good idea?

Think long and hard before you hand over your money to a stranger, or even a club of strangers. Foreclosure investment clubs can work, but there are also a number of scams out there that prey on potential investors. If you find one that is of interest, investigate them and their practices thoroughly before committing any money.

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