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Investing in foreclosed properties
Martin Lukac
There are a lot of people looking to make money in real estate
-- quickly and with no money down. Real estate foreclosures are
said to be an instant success. Are they?
Foreclosure properties have the potential to be a good place to
invest for exponential growth or loss. There are some situations
out there for little or no money down, but you should take some
precautions because foreclosed properties come with significant
risks.
There are many ways you can invest in foreclosed properties. The
most popular way is to purchase a property, fix it up and rent
it out, creating a positive monthly cash flow. The investor
becomes a landlord, and assumes the responsibility of an
investment property owner.
The second way to make money is to seek out foreclosures or
fixer-uppers, buy them, invest in repairs and remodels and then
sell them at a profit.
The third way is to buy a nice foreclosure that is underpriced
and sell it immediately at a higher value. This often comes
through selling at a higher value through a take back. For
example, you buy a $100,000 house at a foreclosure for $50,000.
You pay 10% down and create a new mortgage for $45,000. You then
turn and sell the property for $80,000 with 100% seller
financing.
Underpricing the house pulls in a buyer quickly. By taking a
promissory note for $80,000, you have now created a $35,000 note
for yourself. The buyer pays you on the $80,000 and you pay on
the original $45,000 note.
If you are paying 8% interest on a 30 year mortgage, and the
buyer is paying you 9.5% on a 30 year mortgage, you will be
making around $306 a month. If the borrower stays in the house
for 30 years, you will make $88,295 in interest and $30,000 in
capital gains after paying the interest on the first note. And
all you originally spent was a $5,000 down payment.
The downside is that not all mortgages allow an owner to do
this. Most loans today contain a "due-on-sale" clause, meaning
that if you sell the property, you must pay off the mortgage
immediately.
But before you start out on any real estate investment
adventure, here is some advice.
Make sure that your spouse or other investors understands
exactly what will and could happen. You are entering a life of
property management. Calls in the night from tenants and other
risks are commonplace.
You should take the time to become well educated. Don't just
read one column and decide this is the time to start bidding on
properties. There are plenty of real estate agents who would be
happy to talk with you about the world of foreclosure
properties. There are many books that will help you learn the
intricacies of investing.
You have to realize that not all foreclosures are good deals.
Not all foreclosed properties sell for undervalue. A buyer can
always default on owner-financing. Most loans today don't allow
you to sell a home without paying off the loan. You will face
repair cost, tenants who don't pay their rent, damaged property,
changing interest rates and taxes.
If making money of foreclosures was easy and a sure bet every
time, everyone would sink their retirements in it. But it isn't
easy. Remember that it is a gamble. Don't worry, there will
always be another foreclosure. Take your time and really
research what you plan to do. With high sales prices on homes,
we'll be seeing more foreclosures up for auction in the future.
Copyright 2006 #1 Loans USA
About the author:
Martin Lukac, represents #1 Loans USA http://www.1loansusa.com a
finance web-company specializing in real estate/mortgage market.
We specialize in daily updates, rate predictions, mortgage rates
and more. For daily mortgage rates please visit http://www.RateEmpire.com
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