{"id":20380,"date":"2020-11-30T15:41:22","date_gmt":"2020-11-30T23:41:22","guid":{"rendered":"https:\/\/www.homelight.com\/blog\/?p=20380"},"modified":"2026-04-07T08:20:38","modified_gmt":"2026-04-07T15:20:38","slug":"buyer-all-about-investing-in-foreclosures","status":"publish","type":"post","link":"https:\/\/www.homelight.com\/blog\/buyer-all-about-investing-in-foreclosures\/","title":{"rendered":"All About Investing in Foreclosures: A Guide for Brand-New Buyers"},"content":{"rendered":"

Whether you\u2019re looking for a one-time renovation project or you\u2019re hoping to start a profitable business of buying and selling houses, there\u2019s a steep learning curve when it comes to investing in foreclosures<\/a>. From understanding the stages of the foreclosure process<\/a> to knowing how to assemble a team of experts who can help you navigate your new project, you\u2019re in for a challenging \u2014 and exciting! \u2014 ride.<\/p>\n

To help get you started, we\u2019re talking to industry experts and assembling our best tips all about investing in foreclosures. Let\u2019s jump right in.<\/p>\n

What exactly is foreclosure?<\/h2>\n

While foreclosure can yield great deals on properties for a savvy investor, there\u2019s an underlying human element that buyers should keep in mind.<\/p>\n

Foreclosure<\/a> is a legal process following default on a loan. Usually, this means that the homeowner has missed several monthly mortgage<\/a> payments, and now the lender is attempting to recoup funds by seizing and reselling the home.<\/p>\n

Foreclosure regulations will vary by state<\/a> and the specific terms set forth in each mortgage agreement<\/a>, but generally speaking, foreclosure is a result of financial hardship suffered by the borrower.<\/p>\n

\"Houses<\/a>
<\/a> Source: (Justin Lam \/ Unsplash)<\/figcaption><\/figure>\n

The stages of foreclosure<\/h2>\n

The process of foreclosure can take anywhere from six months to well over a year, depending on the state and individual circumstances. For keen investors, there are opportunities to pursue homes at each stage of the process.<\/p>\n

If you\u2019re new to the game, working with an agent<\/a> who is experienced in buying foreclosures will be essential to finding properties and navigating this unique buying process.<\/p>\n

Pre-foreclosure<\/h3>\n

As the term implies, pre-foreclosure<\/a> is the point where a homeowner is behind on their mortgage payments, perhaps far enough that they have received a notice of default. The notice of default will indicate how much time the borrower has to catch up on their loan before the property is seized by the lender, and these notices are typically public record.<\/p>\n

Investing at the pre-foreclosure stage is similar to a conventional home purchase in that you\u2019ll have the chance to walk through the home, order an inspection<\/a>, and secure financing<\/a> if necessary.<\/p>\n

The downside is that competition for homes in pre-foreclosure is high, since the property is often still in good condition and can likely still be sold at a favorable price. From the current homeowner\u2019s perspective, selling while in pre-foreclosure can be a welcome lifeline when the home is worth enough to recover debts and satisfy the balance of the mortgage.<\/p>\n

Short sale<\/h3>\n

A short sale<\/a> occurs when a homeowner is delinquent on their loan but the house is not worth enough to satisfy the remaining balance on the mortgage. The lender must sign off on a short sale<\/a>, as they are effectively agreeing to settle debts for less than what is rightfully owed.<\/p>\n

While you\u2019ll still be able to walk through, inspect, and obtain financing for a short sale home<\/a> as an investor, there\u2019s typically less room for negotiation and less opportunity for a great deal; few lenders are willing to let the property go for significantly below market value.<\/p>\n

Foreclosure auction<\/h3>\n

A property typically becomes available for auction when the home has legally been foreclosed.<\/p>\n

While processes will vary from state to state, foreclosure auctions<\/a> allow for a quick recoup of funds. Sometimes banks will set a required minimum sale price, and sometimes they\u2019ll simply sell to the highest bidder \u2014 which can translate to big savings for foreclosure investors who are willing to take a chance.<\/p>\n

Homes that are up for auction are sold on an as-is<\/a> basis, which means that there are no walk-throughs or inspections. Securing financing for an auction property can be difficult, so consider this a cash-is-king situation. If the property can<\/i> be financed, you\u2019ll need the full down payment amount<\/a> available at the time of your bid.<\/p>\n

Finally, keep in mind that auctions are fast-paced and there\u2019s a lot of competition. You\u2019ll need to be prepared to act quickly.<\/p>\n

Bank-owned<\/h3>\n

Also referred to as real estate owned (REO), these are properties that did not sell at auction and are now fully owned by the bank. Since the pressure of the auction is off, you\u2019ll often be able to walk through and perform inspections \u2014 without electricity or running water, in most cases \u2014 if you\u2019d like, but you\u2019ll still be limited in your ability to ask for repairs or allowances.<\/p>\n

Bank-owned<\/a> or REO homes will be listed at their appraised market value, so discounts may not be as deep as you might anticipate from a foreclosure. On the upside, there can be less competition to buy these homes, and you\u2019re back in the realm of financing possibilities if cash isn\u2019t your preferred option.<\/p>\n

Distressed loan bulk-buys<\/h3>\n

While this approach is less common for first-time investors, some experienced foreclosure investors will purchase distressed mortgage loans<\/a> from lenders in bulk.<\/p>\n

These investments require a lot of upfront cash to acquire the loans, but there\u2019s money to be made if homeowners can catch up and continue paying their mortgage, or if homes are already vacant and ready to be prepared for tenants.<\/p>\n

Is it better to fix and flip, or buy and hold?<\/h2>\n

No matter which path you take to find your foreclosure investment property, you\u2019ll need to have a plan for what comes next.<\/p>\n

Fixing and flipping a foreclosure<\/h3>\n

This is when a buyer purchases a house below its market value, then goes in and makes any necessary repairs or value-adding upgrades<\/a> with the intention of selling the property for a profit.<\/p>\n

While many folks have built successful businesses out of flipping houses<\/a> (just look at all the fixer-upper shows on HGTV<\/a>!), putting the finishing touches on a foreclosure is no guarantee of forthcoming riches.<\/p>\n

\u201cThere [can be] so many hidden costs,\u201d warns Jennifer Young<\/a>, a top real estate agent with 19 years of experience selling homes in the Cincinnati, Ohio<\/a>, area.<\/p>\n

\u201cA house may look good from the surface, but when you start getting in there\u2026 People are [sometimes] angry that they were losing their house. They might steal things or destroy the house, cut the wires and so on \u2014 it can get very expensive, very quickly.\u201d<\/p><\/blockquote>\n

Being mindful of your budget is critical when it comes to purchasing a foreclosed property with the intention of flipping it. If you pay too much for the house itself, spend too much on renovations, or aren\u2019t able to fetch your intended resale price, then you could end up losing money on your investment.<\/p>\n

\u201cGenerally, it\u2019s the area and the price that dictate whether a house might be a rental or a flip for me,\u201d says John Durham<\/a>, a top real estate agent based in Atlanta, Georgia<\/a>. Durham is a foreclosure investment expert who owns more than 20 rental properties and estimates that he has been involved with flipping approximately 500 houses over the last two decades.<\/p>\n

He notes that there are fees for selling a house<\/a>\u00a0\u2014 between agent commissions, marketing fees, and closing costs \u2014 so if margins are thin on your investment, it may make more financial sense to keep the property as a rental.<\/p>\n

Buying and holding a foreclosure<\/h3>\n

This is a popular option for first-time foreclosure buyers, as holding a rental property can be an effective way to generate passive income. Once the house is purchased, renovated, and ready for a tenant, you\u2019ll have two starting points:<\/p>\n