Foreclosures: Good Investment strategy or Bad Deal
Sunday, 30 September 2007
The allure of foreclosed properties to a would-be real estate investor is nearly irresistible: Buy valuable properties for
pennies on the dollar with little or no risk of your own money, work when you feel like it, and grow rich.
Hundres of seminars and how-to books promise to turn even the most novice buyer into a high-powered real estate
investor through the magic of foreclosed homes. The trouble is the dream of instant, safe, trouble-free wealth often turns
out to be like most things that sound too good to be true — a scam. If easy money was to be made, everyone would be
getting rich off of foreclosures.
True, some people do, just like some people get rich in the stock and commodities markets, oil wells and foreign
currencies. But, just like these other forms of investing, profitably buying and selling real estate takes research,
knowledge, experience, money and time. And nearly every deal with a huge profit potential also comes with an
appropriately sized risk.
Beyond get-rich-quick seminars and informational classes offered by nonprofit agencies and local sheriff’s offices, few, if
any professionals are available or willing to teach novice investors the ins and outs of foreclosure sales. Why should they
show you how to buy a great property at a deep discount instead of doing the deal themselves?
Still, if you are willing to go it alone and invest the time and cash required to deal in foreclosures, your first step should be
to understand the process as thoroughly as possible.
The basics
Foreclosure is the legal method by which lenders or governmental agencies take properties from owners who fail to
make payments, and then resell those homes to recoup money owed them.
Nonpayment of a mortgage or home equity loan is the most common reason a home gets foreclosed, but it is far from the
only reason. But people could also be facing a foreclosure because of a balloon payment, not paying property taxes, not
carrying enough insurance, or even failing to keep the property in good working condition, says Rande Johnsen, a
trustee for Trustee Corps in Irvine, Calif.
There are three distinct phases of foreclosures, each with its own advantages and each fraught with peril.
The 3 phases of foreclosure:
Preforeclosure: The time between when the homeowner has stopped making payments and when the land is actually put
up for sale at auction. Investors take this opportunity to deal directly with the homeowner.
- Auction: When the courts seize the property from the homeowner and sell it to the highest bidder. The county sheriff or
a trustee handles this process, depending on the state.
- REO: If the property fails to sell at auction, or if the lender ends up as the highest bidder, the home becomes “real
estate owned” (REO) by the bank. Banks then try to sell these REO properties on the open market, often through a real
estate agent or third-party marketing company.
Often these homes are sold to buyers who don’t even know they are buying a foreclosure and go through the entire
process as they would with any other home.

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