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How To Get A Foot In The Door Of The Foreclosure Market

If you’re still hoping to take advantage of discount prices on distressed homes,

Foreclosure
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Foreclosure

Despite state, federal and industry initiatives to stem the rising tide of foreclosures, bank repossessions hit a record high of 102,134 in September, according to RealtyTrac in Irvine, Calif., which tracks the market.

At the same time, some 347,000 foreclosure filings—default notices, auction sale notices or bank repossessions—were reported during September, a 2.5-percent increase from the prior month and a 1.1-percent increase from a year ago.

From the beginning of 2007 through midyear 2010, more than 8 million properties have received a foreclosure notice nationwide.

“Because of all the foreclosures and short sales, values have been reset,” says Debra March, former executive director of the Lied Institute for Real Estate Studies at the University of Nevada Las Vegas, the nation’s leading metro market for foreclosures. “Prices are very affordable right now. You may find a home that originally sold for $350,000 now listed for $170,000.”

A real estate short sale is one in which the sale price is less than the balance owed on the property’s loan.

Attractions

Foreclosures have long appealed to investors who are looking for instant equity—and willing to roll up their sleeves.

Often, buyers can purchase such homes for 20 percent to 60 percent off their potential market value.

“There is probably three more years of extraordinarily high levels of distressed inventory before we burn through this supply,” said Rick Sharga, senior vice president of RealtyTrac.com. “This is a market where somebody who does their homework can save significant money on a home purchase and create a nice investment opportunity on a longer-term basis.”

Investors entering the market today, however, will have to employ a different strategy than those who came before.

If you’re looking to renovate and flip, forget it. But if you’re in a position to buy and hold, with the intent of either renting your property or sitting on it until the real estate recession subsides, the market is ripe for the picking.

“Investors need to be cautious and have a long-term strategy,” says March.

According to RealtyTrac.com, Nevada, Florida and Arizona lead the nation in foreclosure rates, while Sunbelt cities, such as Las Vegas, Nevada, Modesto, California. and Cape Coral-Ft. Myers, Florida. are among the leaders in that category.

For investors, notes Sharga, a rocky residential market and a growing inventory of foreclosed homes could mean a bigger potential payoff down the road.

“If you combine a down market with the kind of discount you’d be looking at with the typical foreclosure, that doubles your opportunity for success when the market comes back,” he said.

Pitfalls

The process of purchasing foreclosed properties, however, is also fraught with risk.

Without preemptive research, an investor could end up buying a home with an outstanding tax or other lien, for which you become responsible.

“I’ve even heard about people going to auction and buying a second mortgage rather than the first and thinking they got a great deal on a house,” said Sharga.

Before making a buy, investors need to do their homework carefully—that means hiring a contractor to complete a home inspection for big-ticket problems, like structural damage or costly mold.

Investors also need to secure as precise a figure as possible for how much renovations will likely set them back, a major drag on profit.

Finally, buyers should consult a real estate agent to learn about comparable home sales in the same neighborhood, which will help determine how much the house might eventually fetch at resale.

They should also take note of how long listed homes—both rental and resale—have been sitting on the market.

“Many foreclosure investors won’t purchase a property unless it is at least a 30 percent discount,” said Sharga. “That’s because you’ll typically need to do a rehabilitation to bring the property back up to the neighborhood standard, you’ll probably have to finance it for a short period of time and it’ll cost you some money to market the property.”

It may be not sit well to profit from someone else’s misfortune, but keep in mind that when you purchase a distressed property you’re not just doing your investment portfolio a favor.

By reducing the inventory of available homes, you’re also helping to stabilize the residential real estate market, which, in turn, will buoy the troubled U.S. economy.

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