Buying Foreclosures in a Market Downturn

Posted: 13 May 2008 | Categories: Investing

Almost every news report these days is talking about the dire state of the real estate market. Foreclosures have increased dramatically – up 93% from last year. Lenders are faced with massive write off amounts and new construction has slowed as inventory levels of existing homes surged upward. No doubt a grim picture for most groups involved in real estate, but definitely not all. For a few groups such as real estate investors, this downturn in the real estate market and subsequent rise in foreclosures provides an increase in investment opportunities. In fact, many savvy investors worried about volatile stock prices, and who have the means necessary to do so, are actually turning to the real estate market and specifically foreclosures.

Buying foreclosures in a market downturn is not for everyone. That is obvious as many investors caught up in the idea of making money quickly while the real estate market was sizzling are running for the hills. Some actually “cutting their losses” and selling their properties at a steep discount thinking they will be left holding the bag. More savvy real estate investors, fully appreciating real estate’s long cyclical history are taking a very different approach. After all, the less competition from other investors is great news to them. It means more foreclosures to choose from, less people buying up those foreclosures and ultimately better-negotiated deals with the property owners.

Foreclosure investing has remained profitable through the downward and upward trends in the real estate market for those who knew what they were doing. Historically when the real estate market trends upward, it is common to see a flock of real estate investors buying foreclosures right and left. With so many interested investors, market price discounts for foreclosure properties are smaller, typically between 5 and 10 percent. A downturn in the market and less investors buying up foreclosures typically translates into bigger discounts on the market price of a property because banks (who often end up buying back most foreclosures) are highly motivated to move these properties and often welcome lower bids just to get them off their books.

So, if you are interested in getting into foreclosure buying and are ready to ride out this current market downturn, what should you do? The first step always stressed is to do your homework and have a plan. Yes, it is an exciting time for an investor to jump into the market, but doing so without an understanding of the market and having an investment strategy in place is a recipe for disaster. Take some time to look at your local market and to get a feel for what is happening. Not all areas of the country are experiencing a severe downturn to the extent of what is being seen in California, Florida and Nevada. Search Foreclosures… Moreover, you want to create a long-term picture of how your specific market has performed historically. As we stated, the market is cyclical. It goes up and down and then back up again. Knowing when your market may turn around puts you in a better buying and ultimately selling position.

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Developing a strategy is another must. Most investors stick to the same investment strategy and modify it to compensate for changes in the real estate market. In a market downturn, one popular strategy a real estate investor uses is to build a strong cash reserve for foreclosure expenses (repairs and renovations) and then to focus on acquiring and holding foreclosure properties that can generate income (rentals). Then, when the market begins to swing upward, they start selling those properties, and moving on to others with cash in hand. The best properties will hold their value so focusing your efforts on finding and buying foreclosure properties that support your core investing fundamentals is always wise, regardless of what the market is doing.

Like any other type of investing, foreclosure investing is risky. Therefore, the importance of having a solid plan and well-developed strategy in place as you start uncovering those foreclosure gems is a must, if simply for no other reason than to lesson that level of risk. Investing in foreclosures takes work and a lot of searching to identify those properties that best fit your investment strategy, but in today’s market, it can prove profitable if done right.

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