The real estate foreclosure market is in full swing and many people, home buyers, long term investors, and those who want to buy and make a quick profit are searching for the best deals. They are in the market to buy homes and apartment buildings, farms and ranches, commercial and industrial properties, and vacant land that banks are trying to liquidate from their inventories.
Banks make their profits by loaning money, not by taking properties through foreclosure. It costs banks a lot to have properties go through the the foreclose process. The bank has to put the property in default, foreclose on it, then let it sit in it's inventory for up to a year or more before it can sell it. And if the mortgagor files bankruptcy, the bank has to pay it's attorneys to go court and handle the transaction property through the bankruptcy process.
So no matter what the outcome, banks and other lenders are not giving the property away. Foreclosure is an expensive process so the banks will try to sell or auction the property at or near market value to recoup some of the loses.
A prospective buyer, especially one who has cash, may get a good price that is below market value but in most cases, the sale will be somewhat closer to market value.
Is it a good idea to buy foreclosure properties? Of course it is, but there are pitfalls that you must be aware of. As a buyer, you must always be cognizant of what is going on in the real estate and financial markets because what may be a low price today may be above market value next month if prices continue to fall.
You can always buy a property for less than market value and then sell it to make a profit if it appraises for a higher price than what you paid for it. When buying foreclosure properties, especially if the purchase is simply to resale for a profit, make sure that the value is there. In other words, you must do your homework. Just because it is a foreclosure sale does not mean that it is being sold way under market value.
And what many first time investors fail to take into consideration is the fact that there will be other costs associated with reselling the property. You must factor in all costs such as repair work, realtor fees, escrow fees, title fees and other charges, and the monthly payments that have to be made until the property is resold and the escrow closes.
If you are buying the property as a rental, like buying a rental in a good housing market, you want to attract good tenants. Even if you get the foreclosure under market value, unless your down payment is enough to drop your monthly payments to a point where the rental income covers the note, you may still have a negative cash flow. If you have a negative cash flow, having your tenants pay their rents on time will be most imperative, especially if you intend to keep your mortgage current.
Appearances are deceiving. What may appear to be a good deal when buying a foreclosure property for resale, may turn out to be a bad investment. This is not to say that all foreclosure purchases are bad and you can't turn a profit if you buy one. This is just a warning for you to be careful and make sure that you have enough money set aside just in case you can't resell the property as fast as you might want to.