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Investing in Foreclosure Real Estate

From 1960 to 2007, national homeownership rates grew from 60 percent to 68 percent according to U.S. Census figures. Federal Reserve data indicates that the market value of the real estate holdings (of households, nonprofit organizations, and non-financial businesses) grew from approximately $19 billion in 1990 to around $30 billion in 2004. Home ownership has long been the "American Dream", and because of real estate's historical appreciation rates over time, it remains an attractive investment for many consumers.

The stock market is an amazingly complex system that is often boiled down to a simple investing approach; "buy low – sell high". In that regard, real estate as an investment follows the same basic strategy. Locating properties that you can purchase below their market value is the ideal approach to a successful investment. Of course the more complex part of the equation is knowing where and when the best real estate opportunities will present themselves!

We have determined that the most successful way to invest in real estate is to locate properties below their market value. Market value is simply the price at which something will sell within a reasonable period of time. In a normal or average real estate market, "reasonable" generally means one to three months. The following are the seven most common reasons why a property is being sold below market value:

1. Homeowners that are late on their mortgage payments (i.e.; in pre-foreclosure) and are trying to avoid foreclosure often sell there home at below market value.
2. Foreclosure properties (REO's). Banks are not interested in having a large real estate portfolio and are often eager to "dump" the properties below market value to get them off the bank's books.
3. Title problems that are messy but can be remedied; often sellers either don't know how or don't want to deal with the situation.
4. The house has been on the market for an extended period of time and the sellers get more anxious to sell it, reducing the asking price over time.
5. Inherited property with heirs that want cash vs. the responsibility of a property.
6. A family situation or dramatic change in income status, such as a divorce, death of a spouse or lost job.
7. Homes in poor condition and in need of repairs, or homes damaged by flooding, fire or other disaster.

Foreclosure Rental Property Investing

The Standard & Poor's Index (provider of independent credit ratings, indices, risk evaluation, investment research and data) posted earning yields of 5% to 6% on average, in the 1990's. At the same time, the dividend yields of the S & P were only around 2% or less. Since dividend-paying stocks tend to be much less volatile, the gains on the appreciation side would not normally be a significant factor. Yet bond yields taken as a composite, showed only around 5% returns during the same period. Better yields were riskier, while safer bonds returned lower yields. What does this mean to you, the real estate investor? Buying homes and flipping them may, in the short term, provide large yields but rental properties provide a steady stream of extra income.

Rental property investment can generate similar returns and can throw off cash as follows:

1. Start by only choosing properties with rental yields of 6% or better.
2. Rental properties normally appreciate in value with inflation.
3. Rents usually increase with inflation, while mortgage payments on the property remain stable.
4. Using leverage, while being careful to buy properties with good rental yields provides greater returns.
5. Amortization, or paying down the loan, frees up more investment resources to increase leverage.

General Real Estate Types

A new real estate buyer should take time to familiarize themselves with a few basic real estate terms and facts about the market. A solid grasp of real estate terms and a strong foundation of facts, will better allow a buyer to make decisions about such issues as real estate market value, influences on home value, and what role timing plays. The three property types accounting for most of the real estate transfers are:

1. Buying Vacant Land
   Farm and ranch specialists have long been quite successful in this business. Generally the property size and price is quite large, with corresponding commissions. Be sure you understand the specific buying requirements and motivations of your purchase.
2. Buying Residential Real Estate Properties
   The residential type of property is by far the most popular with both new and experienced agents. That's no surprise, since the year 2000 US Census shows more than 105 million occupied housing units.
3. Buying Commercial Real Estate Properties
   Commercial property can be empty land zoned for commercial use, or an existing business building or buildings. Commercial property is a more complex method, taking into account the income potential of the property, historical revenue, & cash flow with owner.

There are many additional important real estate terms to understand before conducting a real estate transaction. When you understand the basics of real estate, investing in real estate can open doors. Information is power and can assist real estate buyers and sellers with the edge needed to either buy the home of your dreams or begin profiting from real estate investing.