How to Buy Foreclosures for Profit

By Jaye Lewis

It sounded like the perfect plan. We needed a house, and we wanted one that we couldn't afford. A nice sized yard with a fence, perhaps a workshop, garage, and room to grow. There was no way that we could afford a home like that. I was certain that I knew everything, since I had worked for a mortgage company 18 months before. That's when we heard that foreclosures were a quick and easy way to make money.

We found the perfect house by word of mouth. It was so easy, we just knew nothing would stand in our way. The house was set back on a full acre-and-a-third. It was a lovely shade of yellow, and it was loaded with every dream we ever had. The garage was huge, the shop behind the garage was fully equipped. Inside, the walls were solid, with three bedrooms, two baths, and a full service kitchen. The foundation was sound, and when you pulled down the attic access, it had a full set of hardwood stairs. Walking into the attic nearly took our breath away. It was fully paneled with beautiful knotty pine. At a mere $30,000, this house was ours! With a little bit of paint, and a few plants for curb appeal, we were going to make a million dollars. Okay, maybe not a million, but we were going to be close to rich, inside of six months!

We raced to our bank, and we applied for a loan. Strangely enough, it was approved in a day. There we were, check in hand, ready to buy the perfect - what I like to call - "clearance" house. We raced to the foreclosure bank to buy that house. We were definitely the first lucky couple in line. Hearts in our throats, we handed over the check, only to discover that the house had been sold, and off the market, before we had even seen it. In fact, the man who bought it did so sight unseen. We were devastated! Nearly 25 years later, I can still see that house, in all its pristine beauty. Boy did we learn!

The following information is essential to understand, before you buy that foreclosure house:

Know the Business: Buying a foreclosure as investment property is not for the faint of heart; nor is it for children. The serious investor either has his own money or has a back-up investor who has money. The serious investor has established a trust relationship with a banker. It's not impossible to begin small and grow big. But understand which comes first. Keep your credit clean, and work with one banker. We have discovered that what a world-wide bank won't take a chance on, a rural banker, who knows you, just might. So, if you are a beginner, start small and gain that trust.

Know your market value: This is so important, and it is often the most ignored. Especially in this "flip that house" era, any house in an inflated market is considered a safe bet. However, in a fluctuating market, any house can become a big mistake. How much are other houses in the neighborhood selling for? What is the market value, not only for the house you want to buy, but what is the market value, or going rate, of all the houses in your region?

Know the Law: This is different from state to state. You do not want to arrange the perfect deal, only to discover that you have broken the law in your state. Research is essential. Does your state use Mortgages or Trust Deeds? And what is the legal time-frame and implication of each?

Know your strengths and weaknesses: If you can construct a good sentence, but are helpless at math and ordered thinking, I would urge you to find someone you trust to take over those areas, or get out before you get sucked in. Do not attempt this kind of investment on a whim. Attend estate, county, or sheriff sales, where these people gather. Talk to them, and don't be afraid to ask questions. They are usually happy to give advice and share their triumphs and defeats.

Know real estate terms and their meanings: What is a federal tax lien? Varying types of interest? Land grants? Are there unpaid taxes? What is an abstract title? These are terms, along with a host of others, that you need to understand. Read. Ask the experts. And don't make a move until you understand them.

Know the difference between Pre-foreclosure and Foreclosure: You can't be too early, nor can you know too much. But how can you know which property will foreclose? Your newspaper Want-ads, for instance. All foreclosure properties about to be sold will be advertised. It's the law. That gives relatives a chance to step in and save the family farm. You can also do your own research at the county recorder's office. In some states, the county itself has a newsletter that is sent out to subscribers quarterly, informing them which properties will come up for sale, and when they will be sold. That's pre-foreclosure. Sign up for the newsletter. Foreclosures, on the other hand, are handled by the bank. They may be ready to cut their losses and sell to the highest bidder, or they may simply want to sell for what is left on the loan. Yet another reason to get to know a banker.

These are simply a few guidelines to help you get started. Remember, research is everything, and ignorance is not bliss. I suppose that there are a few lucky souls who simply fall into this, but I have never known any. Smart investors never do anything in the dark. Knowledge is the key. Talk to a friendly real estate broker. Take some classes at your local community college. Read everything, and watch the market. It's just as easy to lose money as it is to make it. The person who understands the most will become the most successful. Otherwise you just might become the victim of your own foreclosure.