Buying Foreclosures: A Good Investment for Young Professionals?

Robert Kiyosaki, of "Rich Dad, Poor Dad" fame often tells us how important it is to have positive cash flow rather than just relying on capital gains. This is why he advocates real estate investments such as rental properties rather than just buying stocks and index funds and watching them appreciate. I personally don't think that his way is the only way to accumulate wealth, I think that I would be just fine with my current strategy (401(k), index funds, some stocks, my home), but I do think that it would really help. My personal motto is something along the lines of "you can never have too much money," so I think that getting into real estate investing could only help me accumulate more wealth faster.

One good way to invest in real estate (separate from your main residence) is to find good values, fix them up, and sell it for a profit. Well, what better way to find a good value than with a foreclosure. For those that don't know, a foreclosure is basically what happens when people get in over their head and cannot pay off their mortgage. The bank just wants to get back as much of their money as they can, so they auction the house off at a discount. There are three types of foreclosures, you can buy directly from a homeowner in trouble, buy from the bank that has repossessed the home or buy at public auction. According to the Money Magazine article entitled "Foreclosures: Bargain hunters beware!" houses that have been foreclosed sell for an average of 15% less. Not too shabby a start.

However, buying foreclosures apparently isn't all sun and profits. According to the article, many of the best real estate values have already been bought up because more and more "regular people" are getting into real estate investing and flipping houses. I hopefully haven't missed the party, but it stands to reason that once TLC has a show about it, the party has at least been started. The article points out a few common misconceptions to steer clear of in order to still turn a profit buying and selling foreclosures.

• Myth no. 1: A big spike in foreclosures is right around the corner.
  One would think that because of the housing boom over the last 5 or so years that a lot of people may have gotten in over their head with their mortgages, especially with some of the exotic mortgages. What happens when that adjustable rate mortgage rate rises to an unaffordable level? Used to be that the banks would quickly try to take their property back to recoup some of their money, but not so much anymore. Now banks realize that it is better for them to help people having trouble paying their mortgages rather than go through the long foreclosure process.
  
  
• Myth no. 2: Foreclosed houses sell for far less than their market value.
  In certain "hot" areas, foreclosures may not be discounted at all. The other part of the foreclosure equation that needs to be taken into account is how much it will cost to fix the place up.
  
• Myth no. 3: Anyone can make money in foreclosures.
  Obviously not true...otherwise everyone would be doing it. There is always a chance that you will overpay or have to put too much money into the property to fix it up. The article points out that foreclosure auctions can be especially risky. Rick Sharga, vice president of marketing at foreclosure listing site RealtyTrac.com says of auctions, "You are buying the property sight unseen, and you will be responsible for any taxes, liens or second mortgages still on the property." The article also points out that you could be responsible for evicting someone still living in the house.
  
  

So, the question remains...is buying a foreclosure a good move for a Young Professional? I am still not sure, I think that there is a lot of issues to take into consideration and many potential pitfalls. It could also turn out great and net me some extra money. It is something that I would like to try at least once, just to see how it goes. If anyone has any experiences that they would like to share, I would love to hear about it.

Tags:

• Real_Estate