The Basics of Foreclosure Investing in the USA
What is foreclosure investing?
Foreclosure occurs when a homeowner is no longer able to meet their mortgage payments and must default. At this point, the house becomes foreclosed and is eventually put back on the market by the bank. Essentially, the bank must now sell the property to minimize any losses associated with the defaulted mortgage.
With that said, foreclosure investing refers to the practice of buying homes that are being defaulted on and turning them for a profit. There are a couple things you should know about what it means to be a foreclosure investor. First of all, the major requirement is that you have cash. You need an abundance of capital to purchase these properties unless you plan to take out a second mortgage.
The next aspect to understand is that foreclosure investors make money by spending money. Once you purchase the property, you often must fix the property up before reselling it. Even when you get to the point of putting the house back on the market there are still selling costs. It isn’t until you completely sell off the property to a new owner that you see some positive cash flow. Of course, this is assuming that you did your calculations correctly and actually did turn a profit on the foreclosed property.
How can you ensure that you make money from foreclosure investing?
It all comes down to the calculations regarding your future sale price and all of the expenditures put into the property. Let’s hope for your sake that the former sum is greater than the latter so you can earn a profit. The trick is to have an eye for detail, as well as knowing what to look for when trying to uncover potential repair expenses as you view the property. Once all of the renovation work is completed, you can better your odds of success by knowing how much these upgrades contributed to the overall property value.
How do you actually go about finding foreclosed properties?
You can find foreclosed homes in a number of ways. Here are three in particular:
Search on Zillow.com to find bank-owned properties
Consult your local MLS for foreclosed properties
See the public records listing individuals defaulting on their mortgages
From there, you can contact the appropriate contacts, whether it is a bank or a homeowner who has put in their notice of default but has not yet relinquished control of the property. In the latter case, there are investors who engage in pre-foreclosure investing, which is very similar. The only difference is that investors negotiate deals with the homeowners themselves. This is actually beneficial for the homeowner, which we will discuss more in the next section.
Everyone benefits from these deals––even more so for pre-foreclosures.
Every party has something to benefit in the case of foreclosure investments, as discussed here:
Banks benefit since they are able to get a non-performing asset off their balance sheets. This way the banks can allocate this tied up capital elsewhere.
Investors typically get a better deal on these types of properties since banks just want to sell them quickly. Thus, they benefit by securing a property from their efforts.
As we’ve mentioned, this is especially true in the case of a pre-foreclosure deal. A pre-foreclosure deal means the homeowner who had submitted their default notice is now able to sell the property and pay off their debt. More importantly, these individuals are able to avoid a mark on their financial record which would have a lasting impact on potential credit options and rates down the road.
Explore an investing area that allows you to create "win-win" deals, making money for yourself while rescuing homeowners in distress. Our Rich Dad Education speakers will introduce you to methods to locate foreclosure and pre-foreclosure properties, a variety of exit strategies, and ways to fund your foreclosure investments. Be sure to learn about all the ways Rich Dad Education can help you reach your goals.
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