Dealing in foreclosed homes and buildings can be an excellent avenue for real estate investors to make substantial profits, if the right approaches are employed. A foreclosure occurs when a piece of property is used to secure a loan—this is called a mortgage, and usually occurs through a bank—and that loan cannot be repaid in a timely manner by the property’s owner. The bank reserves the right to foreclose the loan and acquire the property as compensation, at which point the bank or creditor generally attempts to resell the property in a public forum to secure the money that was lost in the foreclosed loan. Typically, foreclosed homes and properties are not in excellent condition—otherwise the owner would simply have sold the property in order to repay their debt to the bank. Combine the often-poor condition of these properties with the fact that the bank tends to be more concerned with making back the money it lost (as opposed to devoting the resources to try to profit on the transaction), and the result is often the sale of the foreclosed property at a price well below the market value. With a little work, a real estate investor may seize this opportunity to purchase cheap property, and in turn make a profit on its resale or rental.
Foreclosed properties are most often sold in public auctions. A savvy real estate investor, who understands the direct relationship between increasing variable interest rates and foreclosed loans, will pay close attention to their local economy and market to find opportunities to purchase inexpensive property. If they are successful at an auction, they have most likely achieved one of the primary goals of real estate investment: purchase property below the market value. At this point, the investor will have options as to how he intends to sell or rent that property at or above the market value (therefore earning a profit on his investment). Which option he chooses will be a matter of the condition, location, and context of the property, as well as the investor’s personal preferences.
One classic strategy is to improve the quality of the real estate, enabling the investor to sell the building or land at an increased price. This tends to be the most labor-intensive approach, as it requires actual work towards property management and improvement (or at the very least contracting actual work) to make repairs, renovations, updates, etc. Obviously, as the condition of the real estate increases, so follows its value. Once the investor feels he can sell at or above the market value, based on the improvements made, he will attempt to do so for a profit. This processing of buying, fixing, and selling is often called “flipping” a property, and although it is risky, it can be extremely lucrative if managed carefully.
Another option is to essentially employ the same strategy of purchasing and fixing up a foreclosed property, but in lieu of reselling, the investor may choose to retain his investment while still making marginal profits. This is done by renting the property to a tenant. Again, the value of the property is a function of the property’s condition, so the more improvements that are made to the home or land, the more the investor (or in this case the landlord) may charge for rent. While the investor may not earn one lump-sum profit as with resale of foreclosures, the rental process allows him to retain and profit marginally from his investment over as long a period of time as he chooses. Whichever strategy the investor employs, the same rule applies: purchase under the market value, sell or rent above the market value, and profits will be earned.
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Based out of Indiana, Jay Redding is a real estate entrepreneur, with experience in single family and multi-family investing.
