Real Estate Market: Are Foreclosures the Best Option?

Right now, with the subprime lending crisis still looming, and the real estate market and mortgage market still struggling in many parts of the country, there is a temptation to make  a foreclosure purchase. The idea is that you can get these types of homes on the cheap either flipping them or turning them into investment property as your rent them out (perhaps to people who have been foreclosed on). But buyer beware! Foreclosure purchase is not for everyone, as Inman News points out:

“There are real risks in the foreclosures business … in a normal market. If you’re not schooled in this stuff it’s not for the faint of heart,” said real estate consultant David] Levin.

During the days when home-price appreciation and sales were setting records month after month, investors could profit by scooping up properties for a quick flip. Foreclosures may lure buyers because of the potential for a discounted price, but there can be other associated costs. “I’m keeping my fingers crossed that people don’t get seduced,” he said.

Things have changed in the real estate market and in the mortgage market. Many investors are wary of making a foreclosure purchase, and because the market is flooded with foreclosures, the deals aren’t as good as they could be. And, even though the rental market is expected to keep on the level, it could still be difficult to rent your foreclosure property for what you are putting into it.

And, of course, with tighter lending standards, it is harder to get any type of home loan  at this point. That means that you might not even qualify for a foreclosure purchase, especially if you already have a home.

Short sales: another home buying option

Another interesting home buying option that is arising from the current market involves short sales. Short sales happen when buyers work with their lenders to accept sales that amount less than what is due on the mortgage. The idea is to avoid foreclosure, while at the same time reducing the seller’s obligation to the lender. These short sales are growing in popularity as well.

Foreclosure purchase and short sales can work out well for the savvy real estate investor. And, they typically allow you to get a home at 10-15% (or more) than the value. But there are some risks associated with such purchases. And in the current real estate market, you will need to hold on to the property, rather than turn around and sell it for a profit.