Understanding foreclosure is particularly important as an investor when it comes to the housing crisis that has
gripped the United States. Tremendous opportunity exists for the savvy
investor, but only if the investor understands the foreclosure process
and how to take advantage of the opportunities that are presented.
 

A foreclosure happens when a person or entity fails to make a number of payments on a Promissory Note secured
by real estate.  A Promissory Note is secured by a mortgage pledging
the real estate as collateral for the terms of the note.  If the
borrower fails to pay, the lending institution or individual can take
the collateral, in this case real estate, as partial or full payment
for damages incurred by the lender.  A problem for the bank occurs
when the value of the home that they have received from the borrower
is worth less than the amount of the original face value of the loan
the bank provided.  Banks are not really in the business of owning
and operating real estate, they want to be in the business of lending
money at higher interest rates than what they pay you as the depositor.  
 

To be able to move these non-performing assets off of their books, banks will sell these homes at a discount to help recoup part of their losses.  The degree of discount depends
on many factors such as the condition of the home, the amount of the
original loan on the property, current market conditions in the area
around the home etc.  This can be a great buying opportunity for
the educated investor.  However, just because a property is a
foreclosure,
does not necessarily mean that it is a good value as an investment. 
You as the investor still need to conduct your due diligence and
rehabbing
expense evaluation. 
 

Keep in mind, a foreclosed homed has often deteriorated significantly because no one has lived in the home for over a year.  In addition, the previous owner usually has not
kept up with normal maintenance items due to financial distress. 
It is also not unusual for there to be damage to the home either by
the previous resident or by vandals.
 

A foreclosure can present a great opportunity for a profitable investment.  But like any investment, you must
conduct your due diligence to make sure it will meet your profit
expectations.
 

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