Pros and Cons of Foreclosure and Pre-foreclosure Investment

By: Robert Lam

Before you dive into the exciting world of property foreclosure investing, you should probably be aware of the pros and cons of buying a pre-foreclosed or foreclosed home...

Pros

1. Lower price and higher profit


Pre-foreclosures and foreclosures usually always sell for less than their actual market value - sometimes 20 to 50 percent below the market cost. Among other things, this means that if you turn around and sell the property, you should make a sizable profit.

Nowadays, you can use a short sale to negotiate a lower price with the lender. This is an extremely powerful technique for building equity out of thin air.

2. Rehab potential

Many pre-foreclosures and foreclosures need repairs and renovations. If you know how to rehab a home without spending too much money, you may be able to substantially and cost-effectively increase the value of the home.

3. Lower settlement costs

Since you are often dealing with vendors wanting to get rid of the pre-foreclosed or foreclosed property as soon as possible, you can often get them to agree to lower down payments, better financing options, lower closing costs, and reductions on other settlement costs.

4. Access to the property

Most foreclosure homes are vacant, which means you can often get access to a foreclosed property as soon as you buy it.

Either that or the homeowner knows he/she needs to move out in a short amount of time.

5. More attractive financing

If you're buying a foreclosure from a bank, they may offer you attractive financing to make the deal more appealing to you.

So what are the cons to investing in pre-foreclosures and foreclosures?

Cons

1. Hidden liens and liabilities


It's not uncommon for pre-foreclosed and foreclosed homes to carry liens and unpaid taxes. As the new owner, you'll have to pay these. Sometimes a home owner or seller may not reveal these liens and liabilities to you. However, the good news is that you can find this information relatively easily with a title search and, if necessary, some other research.

2. Poor condition

Just as many pre-foreclosures and foreclosures are ripe for rehabbing... you can also expect many of these to be in extremely poor condition. Unless you've budgeted for the required repairs and/or renovations, you may be in for a nasty shock. On the other hand, if you inspect the property or (if buying the property unseen at auction) budget for the worst, such repairs may be well within your budget.

3. Learning curve

Buying pre-foreclosures and foreclosures requires an understanding of the legal foreclosure process. You also need to be familiar with how to locate potential investment properties and, ideally, discover them when they first enter the pre-foreclosure stage of foreclosure proceedings. This can be a hassle for some property investors who prefer the relatively straightforward process involved in buying regular properties. However, once you're familiar with how to buy pre-foreclosures and foreclosures, you may discover that it isn't really all that burdensome at all.

Overall, pre-foreclosures and foreclosures are a great investment... provided you're willing to understand what buying such homes involves, and are prepared for the educated risks. You need the proper education such as with . Most importantly, you need to apply the information that you learn!

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