What is Foreclosure Investing?
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.