Investing Tips: How To Make Money By Investing In Forclosures

This article gives a brief description of how investors make money by investing in foreclosed properties.

Investing in foreclosed houses can often be a very profitable venture. Foreclosures are often sold at prices well below market value and can usually be bought and resold for significantly higher prices. Investing in foreclosed properties carries a moderate level of risk. The risk is not as high as buying stock in a start up small company, but is greater than placing money in government bonds or money market accounts.

There are two primary reasons that foreclosures are often sold below market value. First, foreclosure is a lengthy process, and the banks are often seeking to sell the houses for the amount that is owed on the original loan. This allows the investor to capitalize on equity paid into the home by the previous homeowner. If the original loan was for $100,000 and the previous owners paid $30,000 toward the principal before the foreclosure, the mortgage company often will be willing to accept the balance of the amount owed on the original note, or $70,000.

The second reason that foreclosures are sold below market value is that the foreclosed property is often not in marketable condition at the time of the foreclosure sale. Many homeowners neglect the property when they realize that it will be foreclosed. Others attempt to remove any items of value, such as light fixtures, window treatments, and appliances from the home before the foreclosure is executed. These factors create a decrease in the curb appeal of the property, thereby decreasing its market value. A foreclosed home that was originally purchased for $100,000 and resold as a foreclosure for $70,000 might appear to be worth only $50,000.

The primary way to make money by investing in foreclosed properties is by purchasing the foreclosure for the amount owed on the original note, repairing the property, and reselling the property for the current market value. This allows the investor to combine money with time and effort to make a profit because property values tend to rise with the passage of time. Therefore, a home that was originally purchased for $100,000 and sold as a foreclosure ten years later for $70,000 might have an actual current market value of $150,000 when presented in marketable condition. An investor could purchase the home for $70,000, spend $40,000 repairing the property, and increase the value of the property to $150,000.

The investor is presented with two options once he has invested the time, energy, and money required to repair the home. Some investors choose to have the house appraised, and then sell the house for the appraised value. This would allow the previously discussed foreclosure transaction to net the investor about $40,000. This in effect closes the investment by placing cash into the investor's pocket.

Other investors choose to have the property appraised and take a mortgage on the property for the new appraisal value. The previously discussed $110,000 the investor has placed in the property has increased the value of the property to $150,000, and the investor can take a mortgage on the property for the full appraisal amount. This purchaser still maintains possession of the property. He then chooses to rent the property and use the monthly rental payment to pay the mortgage taken on the home. Once the property has been rented for the full term of the mortgage, the investor owns the house and land outright, and he has never paid any of his own money toward the mortgage taken on the foreclosed property.

Renting the foreclosed home is generally more risky than fixing the home and reselling. The investor who chooses to rent a repaired foreclosure assumes the risk that he will not be able to find a renter for the property, and will therefore be forced to pay the mortgage note from his own funds. The investor also assumes liability for repair of the rental property, and he may often be placed in uncomfortable situations when attempting to collect rent. Repairing and renting a foreclosed property has the potential to be much more lucrative than repairing and selling, however, because the investor maintains the home as an income producing and appreciating asset.

© High Speed Ventures 2011