Investment Opportunities in Foreclosures

By: Greg Chan
Are you looking for an investment opportunity in real estate? Foreclosures can be a tremendous opportunity for new investors. The profits can be enormous. Foreclosure investing, however, does have risks and one must be fully prepared before beginning.

There are three basic ways to invest in foreclosure: buying from the lender after foreclosure, buying pre-foreclosures, and buying at foreclosure auction.

Buying REOs

When you buy from a lender after foreclosure, it is called buying REOs or real estate owned. REOs is the least risky way to buy a foreclosure property. Buying an REO can be very similar to regular real estate and are thus relatively safe. One possible risk is that you may not get a seller's disclosure. You can usually, however, sue the lender for restitution if something goes wrong.

Buying Pre-Foreclosures

Buying a pre-foreclosure property is somewhat riskier than buying REOs. For example, desperate sellers may lie to you about the condition or the presence of liens on the property. One should also pay close attention to whether the seller has entered bankruptcy. If the seller is already in bankruptcy, the deed may not be valid unless it has gone through bankruptcy court. Moreover, even if the seller files bankruptcy after the sale, you may have to deed the property back to the seller up to three years after the sale. Laws, however, vary from state to state.

Investors hope to purchase foreclosed properties well below market value. If the seller is under bankruptcy, the bankruptcy trustee may claim that the sale was a "fraudulent transfer" that was not fully valued to pay off creditors. This would force the deed back into the bankruptcy estate.

There are steps you can take, however, to mitigate these risks:




Get an inspection

Use a knowledgeable escrow agent

Look at the property yourself


Buying at Auction

Buying a foreclosure at auction is the riskiest way to purchase a property. At auction, you have almost no safeguards. For example, there you have no real estate agent, escrow, or title report. Moreover, you are not allowed to inspect the property and thus you have no idea or warranty on its condition. In most states, auctions are an all cash transaction that you must complete in a week to a month.

If the property is occupied, it may take months to evict the tenants. Tenants may also vandalize or steal from the property before eviction. Also, the former owner may sue you to overturn the sale, particularly if you flipped the property for a nice profit.

Buying a foreclosure can be rife with risk but also can have great rewards. You can minimize risk by fully understanding the foreclosure process.

Greg Chan is a business and finance expert. He has authored several articles on foreclosures. For more information, visit BestForeclosureLists.com