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. Often, 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.)

Ken Clark answered this question.

RELATED FAQS
  1. How Many Mortgage Payments Can I miss Before Foreclosure?

    The status of your lender and the condition of your local housing market are some of the factors that determine how many ... Read Answer >>
  2. Can FHA loans be used for foreclosures?

    Learn how to get great deals on foreclosures and how you can finance renovation costs using federally-insured FHA loans with ... Read Answer >>
  3. What is PMI, and does everyone need to pay it?

    Also known as "Primary Mortgage Insurance," PMI is the lenders (banks) protection in the event that you default on your primary ... Read Answer >>
  4. When Is Mortgage Insurance Typically Required?

    Learn about the situations in which borrowers may be required to buy private mortgage insurance, and discover who this insurance ... Read Answer >>
Related Articles
  1. Investing

    Helping Clients Navigate Short Sales And Foreclosures

    Both buyers and sellers can benefit from a real estate professional experienced in dealing with short sales and foreclosures.
  2. Investing

    Saving Your Home From Foreclosure

    Learn the tactics you can use to prevent your home from being repossessed.
  3. Managing Wealth

    Investing In Foreclosures Not A Get-Rich-Quick Venture

    Investing in this kind of real estate takes capital, time and careful planning.
  4. Investing

    The Lowest Foreclosure Rates In America

    Despite more foreclosures and a high unemployment rate, signs of life are emerging in the U.S. real estate market.
  5. Investing

    The Pitfalls of Buying a Foreclosure House

    Find out if the house you're eyeing is really a good deal.
  6. Investing

    What Is A Short-Sale Property & How Does It Work?

    A short sale is an alternative to foreclosure whereby indebted owners get permission from a bank to sell their house for less than amount of the mortgage.
  7. Investing

    What Homeowners Need To Know About Zombie Titles

    Understanding how the foreclosure process normally works - and how it dysfunctions in today’s market - will help you avoid becoming a victim.
  8. Personal Finance

    Avoid Foreclosure: How To Handle An Underwater Mortgage

    Foreclosure is the biggest fear of any struggling homeowner. These tips just might save your credit rating.
  9. Investing

    Buy Your Next Home From Uncle Sam

    As a result of rising foreclosures, some Americans will buy their next home from the U.S. government.
  10. Investing

    5 Ways To Avoid Foreclosure

    If you go into default on your mortgage payments, don't worry, there are still ways to save your home.
RELATED TERMS
  1. Foreclosure Action

    The legal proceedings initiated by a lender in the case of mortgage ...
  2. Foreclosure Filing

    The initial legal process of selling a mortgaged property that ...
  3. Foreclosure Crisis

    A period of unusually high home foreclosure rates that caused ...
  4. Foreclosure Buyout

    A refinancing program that allows a homeowner to avoid foreclosure ...
  5. Judicial Foreclosure

    Foreclosure proceedings in which a mortgage lacks the power of ...
  6. Serious Delinquency

    When a single-family mortgage is 90 days (or more) past due and ...
Hot Definitions
  1. Restricted Stock Unit

    Compensation offered by an employer to an employee in the form of company stock. The employee does not receive the stock ...
  2. Operating Ratio

    A ratio that shows the efficiency of a company's management by comparing operating expense to net sales. Calculated as:
  3. Expense Ratio

    A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual ...
  4. Pro Forma

    A Latin term meaning "for the sake of form". In the investing world, it describes a method of calculating financial results ...
  5. Trumpcare

    The American Health Care Act, also known as Trumpcare and Ryancare, is the Republican proposal to replace Obamacare.
  6. Free Carrier - FCA

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
Trading Center