A:

Foreclosure investing involves the purchase of houses that are somewhere in the process of being confiscated by lenders due to the owner's failure to meet mortgage obligations. The investor buys the house with the hope that it can be bought below market value as a result of the bank or lender seeking to move it quickly and recover funds.

Foreclosure investing, despite the promises of late-night television infomercials, is not for the inexperienced. Most of these transactions are done "as-is" and with no warranty. Oftentimes, homes are sold at auction - a process that prevents prospective buyers from completing full property inspections. Therefore, there is no recourse for buyers who end up with houses that reveal dilapidation or hidden damages after the papers have been signed.

Additionally, it is virtually impossible for foreclosure investors in a tight lending market to purchase properties with no money down. More often, an investor is required to put up a down payment of 10-20% to secure a loan. The interest on these loans notoriously eats away at an investor's profits when the house does not "flip" as quickly as intended.

Considering that plenty of highly experienced foreclosure investors conduct business in larger metropolitan markets, it is also rare to find a truly easily salable home at a deep discount. During stable economic periods, the typical discount from market price on a foreclosed home usually will not exceed 3-10%.

(To learn more about this topic, read Foreclosure Investing Not A Get-Rich-Quick Venture, Avoiding Foreclosure Scams and Foreclosure Opens Windows For Investors.)

This question was answered by Ken Clark.

RELATED FAQS
  1. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
  2. What is securitization?

    Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming ... Read Full Answer >>
  3. Do FHA loans require escrow accounts?

    Federal Housing Administration (FHA) loans require escrow accounts for property taxes, homeowners insurance and mortgage ... Read Full Answer >>
  4. Do FHA loans have prepayment penalties?

    Unlike subprime mortgages issued by some conventional commercial lenders, Federal Housing Administration (FHA) loans do not ... Read Full Answer >>
  5. Can FHA loans be refinanced?

    Federal Housing Administration (FHA) loans can be refinanced in several ways. According to the U.S. Department of Housing ... Read Full Answer >>
  6. Can FHA loans be used for investment property?

    Federal Housing Administration (FHA) loans were created to promote homeownership. These loans have lower down payment requirements ... Read Full Answer >>
Related Articles
  1. Home & Auto

    Tax Breaks For Second-Home Owners

    The tax rules on a second home vary, depending on how the property is used.
  2. Home & Auto

    Ins And Outs Of Seller-Financed Real Estate Deals

    Seller financing works like this: Instead of a buyer receiving a loan from a bank, the person selling the house lends the buyer the money for the purchase.
  3. Investing Basics

    How You Make Money In Real Estate

    No matter what anyone tells you, the basic ways that money is made through real estate haven’t changed in centuries.
  4. Investing Basics

    Defining The 3 Types Of Investments

    Investments can be divided into three distinct groups – ownership, lending and cash equivalents.
  5. Credit & Loans

    What is an Alt-A Mortgage?

    Called "liar loans" for their low documentation requirements, Alt-A mortgages were hot until the subprime crisis. Now Wall Street wants to bring them back.
  6. Investing Basics

    The Complete Guide to Financing an Investment Property

    If you're considering adding an investment property to your portfolio, you need to know what your options are for financing its purchase.
  7. Credit & Loans

    New Rules May Make It Easier to Get a Mortgage

    Fannie Mae and Freddie Mac have come to terms with lenders on how to solve mortgage disputes. This could be good news for people with lower credit ratings.
  8. Retirement

    Best Mortgage Companies Friendly to Retirees

    If you’re no longer in the workforce and need a loan to buy a home, which companies are the most welcoming? Plus, good news about qualifying for a loan.
  9. Credit & Loans

    Don't Get Overcharged for Your Mortgage

    Don't pay more for a mortgage than necessary. Here’s a quick look at the different categories and how to be sure you're getting the best deal.
  10. Home & Auto

    Rent-To-Own Homes: How The Process Works

    A rent-to-own agreement can benefit homebuyers with bad credit or insufficient funds for a down payment. Here’s how one works.
RELATED TERMS
  1. Collateralized Mortgage Obligation - CMO

    A type of mortgage-backed security in which principal repayments ...
  2. Balloon Payment

    An oversized payment due at the end of a mortgage, commercial ...
  3. Backlog

    A build-up of work that needs to be taken care of. The term "backlog" ...
  4. Modified Tenure Payment Plan

    A way to receive reverse mortgage proceeds that gives the borrower ...
  5. Reverse Mortgage Net Principal Limit

    The amount of money a reverse mortgage borrower can receive from ...
  6. Modified Term Payment Plan

    A way to receive reverse mortgage proceeds where borrowers get ...
Hot Definitions
  1. Short Selling

    Short selling is the sale of a security that is not owned by the seller, or that the seller has borrowed. Short selling is ...
  2. Harry Potter Stock Index

    A collection of stocks from companies related to the "Harry Potter" series franchise. Created by StockPickr, this index seeks ...
  3. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  4. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  5. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  6. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
Trading Center