Investing in Foreclosures

The growing number of homeowners who are falling behind on their mortgage payments could provide opportunities for real estate investors, says Pat Mertz Esswein of Kiplinger's Personal Finance.

Most of the problems, says the publication, are among homeowners with "subprime" mortgages, whose interest rates are spiking as low introductory rates expire. Some 700,000 of these loans are projected to go into foreclosure between now and the end of next year.

We agree that investing in a foreclosure is not an easy, quick, inexpensive, or surefire route to wealth. The typical deal comes with more problems than the average "do-it-yourselfer" can handle. Even so, it can be a rewarding experience if you're willing to do your homework.

The slower the local real estate market, the greater the chance that you'll find a bargain. This is because sellers and lien holders are forced to offer bigger discounts to lure a smaller pool of buyers.

Experts recommend that you try to buy homes for

• 20% to 30% less than their market value if you plan to "flip" the properties
  
• 10% to 20% less than their market value if you plan to rent them out with the option to buy, and
  
• 5% to 10% less than their market value if you intend to rent them out indefinitely.