Foreclosure real estate investment offers buyers the opportunity to lock in extra value to the resale prices of their carefully selected investment properties. After all, buying low and selling high is the basic principle applied to all successful real estate investing and buying foreclosure real estate can sometimes mean discounts as high as 60-80 cents to the dollar. In addition, land value will rise even if the seller or the real estate market is in crisis, making foreclosure investment a potentially low risk exercise.
Due to the US subprime mortgage crisis, during which the market experienced soaring interest rates and a sharp decline in property prices, many owners have found themselves unable to keep up with their mortgage repayments, let alone sell their properties for enough to repay their loans. Defaults have therefore risen dramatically, creating crippling debt for US lending institutions. Meanwhile, foreclosure real estate investment opportunities are there for the picking. Savvy investors, often cash buyers, are making bargain purchases as banks and owners eagerly attempt to minimise their losses and generate cash-flow. Economically this makes a lot of sense.
Ethically, there is cause for concern amongst some foreclosure investors as they essentially cash in on someone else’s misfortune. But others regard foreclosures investments as picking up properties that require fresh investment in order to thrive. They are simply taking over distressed properties, still essentially owned by a financial institution, from a bankrupt homeowner who is unable to make the repayments. Some state laws allow owners to reclaim their properties within 360 days, while more commonly the foreclosure takes place between 60 to 90 days from the last defaulted payment.
Some investors find real estate at prices so low in relation to the rental income they generate, that the properties offer what is known as a double-digit (at least 10%) cap rate (capitalization rate). The cap-rate equates to the net operating income of a rental property, divided by its value. Many buyers base their real estate investment strategies on the fact that in times of low confidence in a local property market, buy-to-let properties provide highly lucrative returns, while local people are unable to buy, and lack any optimism that market prices will ever increase in value again.
Successful foreclosure real estate investment follows two basic rules: firstly, ensure you purchase at less than 20% of the market value and secondly, do not rely entirely upon foreclosure listings from real estate investment services companies. That is not to say that real estate companies do not offer great value foreclosure properties, but once the lists have come out, several earlier investors might well have bought in, leaving you behind. Wherever possible, go to auctions yourself or use appropriate insider contacts in the market to source a seller. Another option is to make a deal with a foreclosure listing agent to put you in contact with low cost properties that have not yet been listed.