Profit from foreclosures is more than buying a property at a foreclosure auction and then reselling that property for a windfall gain the next day. In this article, we will consider three ways you can profit from foreclosures.

1. The Foreclosure Sale
2. REOs
3. Distressed Owners

Before we dig in, though, let’s consider the process of foreclosure.

The Foreclosure Process

Foreclosure is the result of default. When borrowers fail to make their scheduled mortgage payments, for example, because a contract is shirked, foreclosure can occur.

A legal “notice of default” or a “lawsuit to foreclose” (depending on the state) is typically filed to initiate a foreclosure. This notice is delivered to the borrower at least one month before a foreclosure sale (typically between 60 to 180 days) and subsequently posted on the Internet or in newspapers as public notice.

In response, the borrower can do several things to prevent or delay the foreclosure.

1. Workout the loan with the lender and perhaps reinstate or even refinance their mortgage defaults
2. File a legal defense against the lender and in turn drag the process into court and delay it for a year or longer
3. File for bankruptcy and automatically stay the foreclosure action. In some situations, a bankruptcy court can even annul a foreclosure sale that has already occurred.

Okay, but with no loan workout, and when legal defenses or delaying tactics are ignored or run out, the foreclosure sale date arrives and the property is auctioned to the highest cash bidder. Thus bringing us to the first way you might profit from foreclosures.

The Foreclosure Sale

Though foreclosed property sells at a price lower than market value, foreclosure auctions are not that easy because they are not a typical market value transaction.

No information about the property is given other than its legal description. You must pay cash. There is no “contingency” allowance for financing. The property is sold “as is” with no guarantees or assurances about the title, condition, environmental hazards, or even that the property will be conveyed free of occupants (you may inherit the owner, tenants, or squatters).

Savvy bidders can turn big profits at foreclosure sales, true, but there is a caveat. Never bid blind at a foreclosure sale—you have to do your homework.

REOs

Lenders that win the bid at a foreclosure auction classify and sell the property as an REO (”real estate owned”). Thus bringing us to the second way you can profit from foreclosures—purchase an REO direct from a mortgage lender.

Since lenders often want to remove REOs from their books as quickly as possible, they may grant buyers favorable terms such as low or no closing costs, below-market interest rates, and low down payments. Moreover, when the property needs fix-up work, lenders are prone to accept offers at a discount price. Lenders don’t give REOs away, but you can get good deals.

You can find REOs by attending and following up after foreclosure sales, or by contacting a real estate agent who markets REO listings.

Distressed Owners

Lastly, you can profit from foreclosures by buying property from distressed owners.

Divorce, job loss, accident, illness, business failure, and other setbacks do cause people to miss mortgage payments and get into foreclosure. You may be able to help them salvage their credit record and some equity, while at the same time secure a bargain for yourself. But its no simple deal.

1. Owners in foreclosure, for example, often owe more than their properties are worth, meaning you must talk the lender into a “short sale”. This is not easy.
2. Many who face foreclosure contend with the claims of multiple creditors. You must be sure that none of those creditors has filed a lis pendens, or the IRS a tax lien. If so, you will have to clean it up to gain clear title.
3. Before you finalize a pre-foreclosure purchase with a property owner, you must thoroughly inspect the property and accurately estimate the costs of repairs and renovations. You cannot profit from foreclosures whenever you gloss over inspections and make only an eyeball guesstimate of expected costs.
4. Someone facing foreclosure will not be an easy to deal with. So don’t act like a foreclosure shark. Rather than a “Here’s my offer-take it or leave it” approach, develop a sensitive, empathetic, problem-solving approach. You’re more likely to come up with a win-win agreement.

Here’s to your success.

Vacant land is a real estate investment for the speculator because vacant land does not produce income. In fact, land investment costs the investor money each year in real estate taxes and mortgage payments.

This explains why vacant land investment is frequently referred to as an alligator; it just eats. Since land does not depreciate, it doesn’t even offer tax write-offs other than the actual outlay of taxes and mortgage interest payments being paid by the owner.

So why invest in vacant land? Obviously, the real estate investor is not looking for an immediate return on his invested capital; in turn using excess investment funds, where cash flow is not important. The real estate investor’s goal is to buy a parcel of land that will greatly appreciate during the holding period, sometimes even doubling or tripling in value in a few years (depending on the location of the land investment).

Okay, since it’s not the natural order of things for a vacant land investment to generate cash flow, it’s important for the real estate investor to explore ways to offset some the expenses associated with land investment. When the land can be farmed or used to graze cattle, for example, the investor might be able to lease the land to a user.

Vacant land investment is a different type of real estate investment geared for speculators. Whereas vacant land investment is completely management free and the profit potential generally far greater than in the ownership of improved, income producing property, the risk is also greater.

In desperate times, REO lenders often turn to mass marketing and highly advertised public auctions to unload their REOs, though no lender likes to publicize the fact that it’s throwing down-on-their-luck families out of their homes.

Given the times we’re now in, you might be considering the purchase of an REO (Real Estate Owned) property and are not sure how to find them. You can find REOs in two ways:

1. Follow up after foreclosure sales
2. Locate a Realtor who typically gets REO listings

Follow Up on Foreclosure Sales

If you attend foreclosure auctions, make note of the lenders who cast a top bid for a property in which you’re interested. Afterward, contact the lender and express your interest in purchasing the REO property. Even if that particular property doesn’t work out, you at least open the door of communication with the lender and might be able to work out a deal on another REO.

Locate Specialty Realtors

Many mortgage lenders often do not sell directly to REO investors because, as mentioned, they don’t like the unfavorable publicity, and they want to promote good relations with real estate professionals.

As one part of your efforts to find REOs, cultivate relationships with a Realtor who specialize in this market. In most cities, you can easily find REO specialists by looking through newspaper classified real estate ads. Once you identify several advertised foreclosure specialists, give each one a call and learn their backgrounds. For example, discover whether he or she only dabbles in the field of REOs and foreclosures, or do make this field their full-time business. The more skilled and experienced the real estate agent is with REO properties and foreclosures in general, the better.

Real estate investors must remain proactive in this real estate market. There are good deals to be made, and interest rates are favorable. Be cautious; just don’t be lazy. Get out and beat the bushes so you can make a couple of good real estate investments while you can.