Looking For a Real Bargain? Think About Investing in Foreclosure Real Estate

With savings interest rates low and the stock market looking too perilous for small investors, many people are putting money in an asset they understand — real estate.

That’s hardly a new development, but what you might not know is that one of the best ways to invest in property is through foreclosure and “bargain” residential real estate.

Current market conditions make it a perfect time for a small investor to purchase one or more foreclosure properties for their private residence, rental or resale. In a difficult economy, upscale homes are going into foreclosure as well, so the idea that such homes are only available in crime-ridden areas is inaccurate. Waterfront and affluent suburban-area Florida foreclosure homes are in the mix of properties available.

Homes valued in the $200,000-400,000 range regularly appear in the national listings that can be found on foreclosuresus.com. Increased availability of more desirable properties combined with Florida home loan rates still at relatively low levels are allowing many people to qualify for the mortgages on these homes.

Last year, one man purchased a Florida ocean-view, four-bedroom townhouse under foreclosure status for about $100,000. He renovated the home in his spare time, spending about $12,000 for materials, cabinets and fixtures to bring it up to “like new” condition. He recently sold it for $197,000.

He also purchased an inland foreclosure property that has also doubled in value after renovation. He decided to rent the second one, and the inland property’s rent exceeds the monthly mortgage and expenses by about $500 a month, giving him $6,000 annual income from the property.

Many owners of homes that go into foreclosure have struggled financially for almost a year before they give up, which usually means the house has not received repairs or general maintenance for a while. This may include everything from light bulbs not being replaced to roofs leaking, tree branches in front yards, broken appliances and windows, etc.

The first rule of real estate, “location, location, location,” applies in these situations. If there is trash in every room of the house, but the foreclosure is in a good area with high property resale values, hold your nose, walk through the entire house and consider making an offer that’s low.

Also, search for hidden foreclosures.

Contrary to popular belief, not all foreclosures are on previously owned homes. Some foreclosed homes are new, and while they are not as easy to identify and rarely appear on national lists, try to hunt them down. The building slowdown has left developers of new mid-scale and upscale homes without a market to purchase them.

With thousands of homes for sale in every city, some builders have reached the end of their construction-loan periods without finding buyers for their homes. In these cases, the banks that issued the construction loans take possession of the homes and attempt to sell them, using real estate agents to handle the deals.

These too are foreclosures, just “hidden” ones because no one associated with the sale of these properties will refer to them as foreclosed homes. In some cities, competition for foreclosed real estate is fierce, while in other cities it is nonexistent. In Mesquite, Tx., and Collierville, Tenn., foreclosure homes are sold in one day to the top offer among many anxious bidders. In other cities, properties sit for days without receiving even a single bid.

The climate of the competition for properties is largely dictated by the number of professional “rehabbers” in the area. Rehabbers buy properties and do the remodeling quickly to flip them for a profit in 30-60 days. These are pros that have contract crews who help them complete renovations and are constantly purchasing properties to keep their crews working.

But even in cities where rehabbers have a strong presence, a foreclosure home can be purchased. Many rehabbers have a maximum price they’ll pay that is very low compared with the value of other homes in the neighborhood. If you are willing to exceed their price by $3,000-5,000, you may obtain the home at a very low price but slightly above what a professional pays.

Of course, if you plan to do most of the repairs yourself and not employ a crew of subcontractors, you may have paid about the same amount for the home when you consider your savings on outside labor.

Getting started costs less than people think. With good credit, many banks will loan the full price of the foreclosure or more. If the home is to be used as a rental, many banks will require only a 10 percent down payment. Individuals with a large amount of equity in another home may get a line of credit from their bank to purchase a foreclosure. When they convert the line of credit to a Florida home loan, no down payment may be required.

Foreclosure homes bought in good areas below market value that appreciate annually can be a sound investment strategy for many investors. What you should remember is that appreciation of the homes is tax-exempt until the home is sold, and if the home is the buyer’s primary residence, the appreciation may be tax-free.

Homes used as rental properties give most investors valuable tax deductions while the house increases in value and builds equity. With stock portfolios down across the country, and Florida home loan rates inching higher and making bargain-shopping even more enticing, foreclosure real estate investing may be the alternative many people are seeking.