How Do Foreclosure Investments Work?
To understand foreclosure investments, something that professionals like Dean Graziosi use almost every single day, you first have to understand why a foreclosure happens. It is basically because someone who owns a home through a mortgage has stopped paying their mortgage. As a result, the bank has decided to reclaim their home. After all, the bank really owns it since they paid the money to the sellers; the buyers did not pay, but just borrowed that money. If they refuse to pay off the loan, the bank takes the house back and the people who lived there are evicted.
The next step in this process is that the bank turns right back around and tries to sell the house. They do not really want the building; they just want the money that it represents. If they can sell it for the amount that was left on the loan when the homeowner stopped paying, everything comes out even and the bank is satisfied.
You can see how this makes foreclosure homes such a good deal. The person who lived there before might have spent 10 to 20 years paying for the house before they were evicted. That money is in the value of the home, but the bank does not need to reclaim it. They will sell the house, regardless of the value, for the price that is left. This is often far lower than market value. However, the homes are sold as-is, so the buyer has to know that the seller may not have left it in perfect condition. After all, they probably did not want to leave. Still, for most homes, this creates an incredible deal for a buyer.
Often, people will try to buy these houses when they just are in the market for a family home anyway. They could have a budget of $150,000, for example, but they might know that they live in an area where you cannot buy much house for that money. If they find a home that originally cost $300,000 but that was paid down to $150,000 before the foreclosure, they can get the type of home that they really want for the budget that they have. The only thing that will be higher are the yearly taxes, but they can usually make up for that since their mortgage payments will be so low.
An investor approaches the situation a bit differently. He or she also wants to buy foreclosures, but the idea is not to live in them, but to turn around and sell them all over again. After all, the value on the house in the example above may still be roughly $300,000 in the current market. If the investor can buy it for half of that and sell it for the real value, there is money to be made.
The way that an investor differs from a bank is in that he or she has time to wait. It will not take more than a few days to sell a house for half of its value. It could take months to sell it at market value. People want to get good deals. Eventually, though, the house is going to sell as long as the price is fair. The investor has to be patient in order to earn anything.1