It seems that nearly everywhere you look recently, someone is touting the incredible benefits and profitability of purchasing foreclosed property. Get rich quick by flipping homes! We hear it in radio ads and see and see it on television shows, and it certainly appears easy. But what are the facts about foreclosure deals? Can you really make money on foreclosed property? Are incredible foreclosure deals fact or fiction? Here are some common myths and the somewhat less glamorous truth about profiting from investments in foreclosed properties:
Fiction: Buying foreclosed property is a simple investment strategy that consistently results in a high profit margin.
Fact: Buying foreclosures can be a wise investment provided that one is well informed and goes into the situation with a plan that includes how to acquire, maintain and, ultimately, sell the property. There is absolutely no guarantee that if you purchase a home, you will be able to sell the home for a profit on any given date. In reality, this is true of all real estate, not just foreclosures. It is always possible that you will lose money, although with careful planning and research, you can minimize this risk. It has become a common myth that ‘flipping’ foreclosures is easy money, which isn’t the case. One very important point that many people miss is that you should always have a third-party inspection of the property to determine its condition. Without this inspection, buying a foreclosed home is an unreasonably risky proposition.
Fiction: In this depressed economy, it is a bad idea to get involved in any kind of new investment.
Fact: Investments always present a degree of risk, but a depressed economy actually offers opportunity for those who have money to invest now, and can wait to see a return on that investment. This simple example will illustrate why. If the stock market is depressed, you can purchase stocks at a lower price. If you are looking to sell, then a depressed economy is bad for you, as both prices and demand are low. But if you are able to BUY, then it becomes a highly favorable situation. You buy the stocks at a lower price, and when the market stabilizes, you can sell those stocks at a profit. The housing market operates on the same principle– buy low, sell high.
Fiction: Foreclosed properties always sell at a price well below fair market value.
Fact: Foreclosed homes do not, in general, sell for substantially less than ‘market value’ unless the foreclosure is an indicator of the general decline of a neighborhood. Foreclosed properties, just like all properties, can sell for less or more than ‘fair value’ dependent upon market conditions. The foreclosure process is extremely expensive for banks, costing in the area of $58,000 on average per property, so they must recoup as much of this loss as possible. So while you may not get a foreclosed home for (as some commercials claim) “pennies on the dollar”, you are likely to get a lower than average price that allows ample room for profit, particularly if you are investing in property upgrades or renovations.
One of the primary reasons that investors lose money on foreclosed property is that they sell too quickly, either out of desperation or impatience, rather than waiting for market conditions to favor a profitable sale.
Fiction: Because the housing market is depressed, now is not a good time to get involved in real estate.
Fact: This is not the first, nor will it be the last time that housing prices will be depressed. However, residential homes are one type of investment that consistently goes up in value over time, almost without exception. The key words here are ‘over time’. Purchasing a home for a good price right now is unlikely to pay off until some time in the future when prices rise again. For this reason, investing in real estate is not for you if you are hoping, or need to, see an immediate profit. If you’re within five to ten years of retirement and will need the money within that timeframe, your situation may be better suited to non-real estate investing.
In summary, there are solid investment opportunities in the foreclosed properties market to be had, even in a depressed economy. But a ‘shotgun’ approach, in which the buyer simply purchases whatever homes are going for the cheapest price will not result in monetary gain. Turning a profit form real estate investments requires patience, knowledge and a lot of hard work.
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