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The bidding process started on a brick house in Baton Rouge, Louisiana at a price of $103,000. Within the first few minutes, Ray Williams was the proud owner of the home, a home he had never stepped into. His winning bid on the foreclosure property was $130,000. The appraised value of the foreclosure home was $155,000.

There were some defects in the foreclosure home like rooted wood and other defects. Ray figured if he would end up spending $20,000 and then he would put the foreclosure property back in the real estate market for $205,000.

Six months back Ray joined the crew of sharp investors who buy and sell foreclosure homes and profit from this phenomenon. In a short span, he has purchased seven foreclosure homes.

According to Ray, if he can't make a $30,000 in profit, he will not bid on the foreclosure property. He has met his goal in the first 5 of the 7 foreclosure deals he has had in his short career as a foreclosure investor.

Foreclosure becomes more prevalent when interest rates rise and homeowners can't make their mortgage payments on time and end up with a foreclosure. There are courthouse auctions you can participate in foreclosure. However, adequate research is very essential prior to your purchase.

Novices face a lot of risks when dealing with foreclosures. Some of these risks can be mitigated by understanding the process thoroughly and doing a lot of foreclosure reading before you dip your toe in the water. Chances are, foreclosure homes come with hidden debts you may not be aware of. In most cases home owners will not let you inspect the property before the foreclosure auction. If you are bidding on properties across several counties, you better know the rules well or you might end up paying through your nose.

A $200,000 house can be purchased at a foreclosure auction for several thousand dollars is a big myth. If there is some equity lurking in the house, you will not get it cheaply.

Foreclosure process

The foreclosure process begins when the mortgagee starts to fall behind on his monthly payments. After 3 months of missed payments, the lender (bank or financial institution) will send a default notice to the home owner as well as to the county. If the homeowner does not pay up, a foreclosure date is set. County officials are responsible for handling the foreclosure auctions and use the proceeds to pay off the mortgage and any other debts that may be secured by the house.

In many cases, the mortgage lenders bid up to the principal amount plus any foreclosure fees. The goal of the mortgage lender here is to recoup what they owed, either from investors bidding for the foreclosure home or by buying the home and reselling it again. As strange as it might sound, foreclosure owners participate in the foreclosure and bid and win the auction, even though they don't have the money, effectively delaying the county eviction until another auction is held for the foreclosure home.

How to find foreclosure listings?

All types of homes end up in foreclosure auctions: wood-frame houses, homes in good and bad neighbourhoods, condominiums, mobile homes, farms, vacant lands.

Your county clerk or your sheriff's department can offer you listings on foreclosures in your county. Some of the counties also publish the foreclosure listings online. Another website foreclosurenet.net provides foreclosure information on bank-owned real estate properties for $30 a month. RealtyTrac.com has a comprehensive listing of foreclosure homes and offers area targeted email alerts for $50 a month.

If you intend to be a foreclosure specialist in the future, spend you time researching a niche market like condominiums or single family owned homes. Libraries are also a good source for foreclosure research and information.

Legal issues with foreclosures.

A big problem with foreclosures is hidden liens. If the homeowner had two mortgages and defaulted on only one of them, remember the other one is still binding. The foreclosure auction official is not obligated to inform you about debts outstanding, so you can be stuck in having to pay off the first mortgage immediately.

A comprehensive title search can cost you $400 or more. However there is a "pencil search" and for as little as $25, you can get quick information about existing liens - raw data you will have to weed through yourself.

In most of the foreclosure homes, the primary mortgage is default and in this case, subordinate liens are eliminated in foreclosure. However, be wary of some of the liens like Internal Revenue Services liens or utility bills you may need to pay off (including fines)

And here is the kicker! Some states offer foreclosure home owners time to reclaim their home by paying the auction price and an added percentage. The state of Colorado offers 75 days. So the foreclosure investor may spend thousands of dollars on remodelling the home, only to find the original homeowner grab back the newly improved home.

Foreclosure investment stages

Many investors spend ample time and money finding homeowners willing to sell for cheap before the auction. Since there are plenty of services who report the foreclosure filings to new subscribers, the competition is fierce.

Once the filing is made, thousands of investors will try to contact the homeowner with letters and phone calls. However, homeowners in pre-foreclosure know their home value so don't expect a big bargain.

Savvy foreclosure investors agree that if you execute a successful strategy, you can make a 20% to 30% return. Buying at the auction gets riskier. You can drive-by and get a feel for the property but you have no clue what is lurking behind closed doors. Sometimes the house may be a diamond in the rough but more often than not, it may have faulty plumbing, old kitchen, dated bathroom, plumbing issues or worst yet, a leaky roof!

Once in a while you may also have to deal with a belligerent home owner who will mess with the property on the way out or refuses to vacate, requiring a lengthy and costly eviction process.

Another risk - Novice investors tend to get excited and overpay for the foreclosure properties. Professional foreclosure investors agree that a profit of 40% to 50% can be made if you are careful and know when to walk out.

Most banks or financial institutions will not finance a foreclosure bid, in part because current home owners are not likely to let them inspect the house to appraise it.

If you are looking for a lowest risk option, buy a foreclosure home from banks that acquired them at auctions. Most banks do have a section on their website where they list the foreclosure properties. Some of the banks will be willing to provide financing on the foreclosure homes.

Usually banks list homes in good condition near fair market value of the real estate property, so there is not much earning potential in such a deal. However, banks also end up with mediocre properties or duds. You can try negotiating these real estate properties, rehab them, and then sell them at or around the fair market price.

Experts agree, profits of such properties are usually in the 15% to 20% range. This is a wonderful place for novice investors to start. You can inspect the home and there won't be any title worries because the bank has already done its due diligence. This will also help you gain confidence in buying and selling the foreclosure property, doing some quick rehab and closing the deal.

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