For many, the word foreclosure has a negative connotation. People think that the house is in bad condition and that the folks who lived in it were horrible people but more times than not, that’s not the case at all. Usually, the owners just fell on hard times and the houses actually are in decent shape. So get the negative out of your mind. Think positive because you  are about to learn why buying a foreclosure can be a real estate investor’s best decision.

The main perk of investing in foreclosures, especially for new investors, is that it’s a practical way to get into investing if you have little or no capital to invest. Beyond that, foreclosures are also great buys because they rank right up there with ugly houses when talking about finding bargain homes that can generate a significant profit. And just like ugly houses, foreclosures come with their share of challenges so a word of caution: to get the thrill of the profit, you will have to endure a unpredictable thrill ride. Be ready.

Foreclosure Basics

Before I get into the ins and outs of investing in home foreclosures, let’s make sure that you fully understand what they are. The textbook definition of a foreclosure is: A legal process by which a mortgagee’s right to redeem a mortgage is taken away, usually because of failing to make payments. Simple enough, right? Maybe. But the circumstances that lead up to foreclosures rarely are.

Now by definition, foreclosure happens because of failure to pay. Sometimes it’s a failure to pay the mortgage is called defaulting on a loan. Sometimes, a foreclosure is the result of a lien that can be put on the property by any creditor the homeowner may owe. In either situation, there are always multiple factors that play into the onset of the foreclosure. Maybe the homeowner never learned how to use credit responsibly and has gone crazy, running up credit card bills they never intend to pay and living beyond their means thinking it will never catch up to them. It happens. But it may surprise you to know that that scenario is more of an exception than the standard. Unexpected unemployment, hospitalization, a death in the family or any of these could put most homeowners at risk for foreclosure. Think about it. How strained would your finances be if faced with any of these situations?

Regardless of how the homeowner got to be in the situation that’s leading them to foreclosure, they often make it worse by keeping their financial troubles under wraps. Pride? Shame? Ignorance? There is no telling why, but many don’t seek out help to decrease their debt until it’s too late and foreclosure proceedings are underway.

Now, I know what you are thinking. You are saying to yourself, it can’t be right for me to try to go in and make a profit off of someone else’s misfortunes. Am I right? Well don’t think of it that way. In actuality, you could be helping the homeowner out. Let me explain.

When a house goes into foreclosure, two major things happen to the homeowner and their family: (1) The family loses the home and (2) the foreclosure goes on the homeowner’s credit report, damaging their credit rating for years to come. Investors who find pre-foreclosure homes can help homeowners to avoid these to some degree. If the investor buys the home from the homeowner and brings it up to date with the mortgage company, for instance, no blemish will appear on the homeowner’s credit report. And in the rare case, some investors will allow the original homeowners to stay in the house for an additional month or two before selling it so the original owners can find adequate housing. Those possibilities make the idea of selling, pre-foreclosure, appealing to homeowners. I won’t go any further into how to progress with those types of foreclosure deals as they can be fairly complex but do keep them in mind as you become a more seasoned investor.

Once the process for a traditional foreclose has started, there’s really no stopping it. The homeowner, unless they can bring their accounts up to date, will lose their home. The mortgage company or bank will re-gain ownership and they will turn around and sell it to the highest bidder. Remember: Banks are in the business of making money, not holding real estate so they’re going to want to get the property off their hands as soon as possible and re-coup the money they lost. So what does that mean for you? You have got an opportunity to make a great profit. Let me break it down for you:

Say the original homeowner purchased the home for $150,000. During the time they were living in the home, they paid $30,000 to the mortgage company and it appreciated $15,000. As far as the bank is concerned, they just want the $120,000 still outstanding on the home plus interest due. So though the house is now worth $165,000, all the bank is asking is $125,000. You can try to negotiate for a lesser purchase price, and you should, but even if you paid the full $125,000 purchase price, you would still stand to make a $40,000 profit when you sold the house. Sounds good doesn’t it? I can almost hear you grinning and I know it’s tempting but I don’t recommend you jump right into purchasing foreclosures. You’ve still got a few things to learn so read on.

Do You Have What It Takes?

College graduates to high school dropouts, teens to retirees. Anyone can be a real estate investor and buy into foreclosure homes but that doesn’t mean that everyone should. Nope. To be a successful investor, particularly when working with foreclosures, you have got to have some fundamental skills. You must:

1. Be a Great Communicator

Communication skills are important because of all the people that are involved in real estate deals. As an investor, you will need to stay in contact you are your lenders, the buyer, the buyer’s lender, creditors and probably real estate agents too.

2. Learn Exceptional Negotiation Tactics

The importance of being a smart negotiator should be obvious. You have got to know how to put out the best deal for you that will also be enticing to the seller. Bad negotiation skills can make or break deals. Foreclosure sellers may be in a bad predicament when you find them but keep in mind that just as you know foreclosures are a good investment, so do other investors. So negotiate a fair deal. If you don’t someone else will.

3. Have Access to Reliable Legal Advice

With foreclosures come quite a few unique and unpredictable situations. Each one you attempt to purchase will differ slightly from the one before and you may have to be creative in the terms you create to make the deal work. Because of this, it’s important to have a basic knowledge of real estate law and to have a lawyer on stand-by just be sure you âre working within the boundaries of the law.

4. Seek Out Knowledge

By now, you know that I believe that educating yourself on anything you do is key to being a success. It’s no different with foreclosures. I have briefly described the process here but in the real world, there’s definitely more to it and if you don’t know what you are doing, there are some pretty deep pitfalls into which you can fall. So before you invest, read and ask questions. Make sure you understand the process and the rules for foreclosing on homes and then use that knowledge to your advantage.