Foreclosure investing is a process of investing capital in the public sale of a mortgaged property following foreclosure of the loan secured by that property.

In real estate, foreclosure is the process by which a homeowner’s rights to a property are forfeited because of failure to pay the mortgage and the property is sold to serve the loan provider. The sale may be administered by the courts (judicial foreclosure) or by an appointed trustee (statutory foreclosure). Proceeds from the sale are used to satisfy the claims of the mortgagee primarily, with any excess going to the mortgagor. Anyone may bid on properties sold at a foreclosure sale. As a practical matter, however, most properties are acquired by the lender, often for the amount owed on the foreclosed loan.

When interest rates rise, homeowners with variable interest rates often become over-extended, providing opportunities for foreclosure investment professionals to obtain investment properties at depressed prices. The most common reason for foreclosure is the dissolution of a marriage. The next most common reason is a failed business venture. Foreclosure investing can provide favorable returns; in fact, foreclosed homes accounted for 39% of home sales in the United States in February 2011, most to investors. For someone who likes the idea of adding a little sweat equity to their investing, buying rental properties is an excellent way to build a nest egg while putting in the extra work that can make realizing a return on investment all the more enjoyable. Another way to use real estate for investing is by getting involved with ETFs and REITs. Those provide a more passive investment, where you simply invest your money and the companies or traders own and manage the properties. The return might be lower than if you did the work yourself, but REITs offer a lower risk, lower pressure way of getting into the real estate market.

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Foreclosure investment types

Pre-foreclosures

Public auctions

Bank-owned sales (REO)

Stages of foreclosure

12 Real Estate Investment strategies