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2010-05-25 21:29:58

Investment Property: What is a Foreclosure?

Understanding foreclosure is particularly important as an investor when it comes to the housing crisis that has gripped the United States. Tremendous opportunity exists for the savvy investor, but only if the investor understands the foreclosure process and how to take advantage of the opportunities that are presented. 
A foreclosure happens when a person or entity fails to make a number of payments on a Promissory Note secured by real estate.  A Promissory Note is secured by a mortgage pledging the real estate as collateral for the terms of the note.  If the borrower fails to pay, the lending institution or individual can take the collateral, in this case real estate, as partial or full payment for damages incurred by the lender.
A problem for the bank occurs when the value of the home that they have received from the borrower is worth less than the amount of the original face value of the loan the bank provided. 
Banks are not really in the business of owning and operating real estate, they want to be in the business of lending money at higher interest rates than what they pay you as the depositor.    
To be able to move these non-performing assets off of their books, banks will sell these homes at a discount to help recoup part of their losses.  The degree of discount depends on many factors such as the condition of the home, the amount of the original loan on the property, current market conditions in the area around the home etc. 
This can be a great buying opportunity for the educated investor.  However, just because a property is a foreclosure, does not necessarily mean that it is a good value as an investment.  You as the investor still need to conduct your due diligence and rehabbing expense evaluation.   
Keep in mind, a foreclosed homed has often deteriorated significantly because no one has lived in the home for over a year.  In addition, the previous owner usually has not kept up with normal maintenance items due to financial distress.  It is also not unusual for there to be damage to the home either by the previous resident or by vandals.  
A foreclosure can present a great opportunity for a profitable investment.  But like any investment, you must conduct your due diligence to make sure it will meet your profit expectations.  
Tell us what you think.  
Jay began his real estate investing career at the beginning of 2005.  He has been a full time investor since 2007. His business focus and specialized knowledge is in rehabs, lease options, rentals, fix and flips, discounted turnkey cash-flowing properties for passive investors, wholesale properties, self-directed IRA investing and basic asset protection. In addition, he is a managing member in two commercial projects.  His expertise has been sought out as a consultant by independent clients throughout the Midwest as well as California and New York. Find out more by visiting

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