How to Invest in Foreclosed Homes

Kevin McCormally: I am Kevin McCormally of Kiplinger's and I am here with Pat Esswein, Associate Editor of Kiplinger's Personal Finance magazine to talk about investing in Foreclosed properties. Pat, we warned people about it for years, these exotic mortgages, the market slowdown, interest rates went up, people could get in trouble. Now I understand that Foreclosures are going up; is there an opportunity here for investing in Foreclosed properties. Pat Esswein: Sure and there has been right along. It is not for everybody, but if you do your homework, it can be a good opportunity. At the peak of the market, in the first half of 2005, the average discount, I should say median discount, on Foreclosed properties was about 15% off of market value. Kevin McCormally: So people would buy these houses for 15% less than they were actually worth? Pat Esswein: Correct. Kevin McCormally: What has happened to that discount now? Pat Esswein: It is possible that discount will increase as the market slows; forclosing lenders are just like any other seller. They may have to cut prices further in order to get these houses off their books. Kevin McCormally: If I want to buy a Foreclosed property, do I have to go to an auction? Pat Esswein: You could and traditionally people think about snapping up these properties on the courthouse steps. That is probably not the best way for most people to do it, it is very risky. Property sold at the courthouse are sold as is and you have no protection, you cannot do an inspection, you can have no contingencies, and you also cannot use conventional financing. Kevin McCormally: Is there a better way? Pat Esswein: Yeah, you want to look at what is known as REOs; that stands for Real Estate Owned. These are properties that the Foreclosing banks have purchased back at the auction and are now reselling through traditional channels like multiple listing services and some other means. Kevin McCormally: How do you know how much you can pay for foreclosed property and hope to make a profit renting it out? Pat Esswein: You really do have to look at the numbers, what is current market value in your area, what is the discount you are going to get on this property? The bottom line is the longer time period that you expect to own this property, the less of a discount you can afford to take because you are going to have that longer period of time to recoup cost and make profit. Kevin McCormally: So this is not for somebody who wants to flip up property quickly? Pat Esswein: Wait, a quick flick was all sort of a misnomer anyway. Most investors will tell you that there is no such --