You've no doubt heard all the buzz on TV and the radio about the national foreclosure rate growing at alarming rates. The reasons for the recent increase of foreclosures are numerous and the subject of debate between economists, the Treasury Department and the lending industry. The good news is that as foreclosures continue to rise, so do the opportunities to invest in them.

Why choose foreclosures?

Investing in foreclosures can be a fantastic money maker compared to all the different real estate investing niches. While investing in foreclosures results in large profits when you choose the right house, there are a lot of other factors to consider to help you avoid losing your hard earned cash. For example, there are laws that vary from state to state and county to county that govern foreclosures and if you violate those laws, accidentally or purposefully, serious consequences will follow.

By definition -

A foreclosure is defined as the act of a lender seizing the collateral (real estate) that was pledged by the borrower at the time of the loan, detailed in the promissory note and mortgage or deed of trust. The whole process begins when the owner can't make payments for one reason or another and defaults on the mortgage, resulting in the lender sending the first letter requesting payment be made as soon as possible.

Now, in the event that the homeowner can't repair the situation by paying the bank any money that is then owed or agreed upon, the property will likely make its way to public auction where it will be sold to the highest bidder at a sheriff's or trustee's sale. A lot of real estate investors (and wannabe investors) look at investing in foreclosures as a surefire way to increase their wealth and/or portfolio but they often fail to realize the potential pitfalls that await them. Understand right now that knowing what to do as well as what not to do will save you a ton of money and headaches as you progress into the arena of investing in foreclosures.

The good news is that there is always enough room for another new investor to enter into the game so don't be afraid to jump in.

A definite "don't" -

A lot of home study courses available today and a lot of infomercial gurus advise using a strategy that almost always ends in disaster is buying a foreclosed property and then renting the house back to the previous homeowner in hopes that they'll soon repurchase it at a higher price in the near future (ie; lease option method).

Understand that one of the highest risks an investor can take is letting the previous owner come back and reclaim their property because they later claim they misunderstood what you had agreed upon, thinking your transaction was only a loan and that they weren't actually selling their house to you. Not good.

Think about this for a minute. Would you really want a tenant in your property that has a history of being a credit criminal and who habitually doesn't pay their bills? Of course you wouldn't. However, many beginner as well as experienced foreclosure investors do that very same thing each day and often pay a high price for doing so, oftentimes losing their investment completely when a judge declares that the transaction was indeed a usurious loan instead of an option to repurchase.

A sea of confusion -

If you've read anything about foreclosures, you've no doubt heard the terms: short sale, REO, pre-foreclosure, post-foreclosure, deed-in-lieu, discounting the lien, etc. Get it clear in your head right now that you don't need to know all of the details of every imaginable buying method in order to make huge profits investing in foreclosures.

What you do need is only to learn the basics, get a couple of deals under your belt and then choose one or two advanced strategies to learn about and apply in your market place. Perpetual learning will surely lead to failure because you end up constantly studying but never actually doing.

As a property progresses through the various stages of foreclosure, you can make a profitable deal happen between you and the homeowner in default or you can wait and try to purchase the property at the auction or even attempt to buy after the auction in addition to many other more sophisticated strategies.

If you intend to buy a property at the public auction, understand that in some states, the law sets a certain time frame for foreclosures to become finalized commonly referred to as a redemption period. If you're considering investing in foreclosures, it is highly advisable for you to find out if and how this law will potentially affects the ownership and possession of the property in your local area. You may wind up thinking you own the property, when in fact you are likely only a temporary caretaker for a set period of time.

It's worth noting that at the same time you've handed over a check as the successful bidder at the public auction, the homeowner could be working out a deal with another investor or trying to sell the property in another way without you even being aware of what is happening. This can obviously have a big impact on what you are able to do to the property during the redemption period, even if it's vacant at the time of the auction. You could actually find yourself investing in foreclosures and dumping cash into them only to end up losing all of the profit you thought you had coming to you.

In and out fast -

When you are investing in a foreclosure, the first step is to determine what you are doing with the property. Do you plan on flipping (wholesaling) it for a profit? Or are you planning to keep it as a rental? This will determine what area you should look in when searching what type of foreclosure properties you're interested in pursuing.

Choosing a property to flip will take some vital research on your part. It's not typically quite as easy as all of the reality shows make it out to be but it isn't rocket science either. You may find a great deal only to discover no house has sold in that neighborhood for 8-12 months at the price that you need to make your minimum profit.

Are you okay with maintaining the property for the length of time it takes to sell? Can you also afford the taxes and insurance on the property? Will the house be subject to vandalism if it remains vacant and, if so, do you have the cash reserves to cover the damages? If you don't study your market and fully understand what makes the difference between a good deal and a bad deal, you could be surprised to learn that your quick turn investment could possibly turn into a rental property. Would it make a good rental?

Always remember when you're investing in foreclosures, the bottom line is always the profit. Size does matter in that regard, bigger is better. A good rule of thumb to follow is to only consider buying a foreclosure property if you stand to make at least a 30% profit no matter what happens. That way, you'll never have to worry whether or not you should make a deal or not.

Of course some foreclosures can bring a much higher profit than others. Some determining factors are the area, past sales, the market value of the home, current condition of the property and the asking price. Once you learn the basics of foreclosure investing in your particular area as well as property values, repair costs, negotiation basics, etc, your success rate and profit potential will dramatically increase.

The end will justify the means -

Understand that once you learn your local market for investing in foreclosures, you will find yourself carefully watching which properties are headed to foreclosure and how to potentially make potentially high profit deals happen on a regular basis. It will all begin to become second nature.

Networking and becoming familiar with other investors in your area as you exchange possible leads that meet each other's buying criteria is a must in order to build your buyer's list. Remember that you never need to do everything yourself and you should actively seek out someone more experienced than yourself to model if you are just beginning investing in foreclosures.

A tried and true method leveraging your time and efforts is borrowing the experience from a professional investor, which can shave years off of the learning curve and help you to avoid potentially serious pitfalls. Education and specialized knowledge are two important keys to success as well as taking massive action on what you learn along the way.

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