How to Profit From Real Estate Foreclosures

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dianap1983's picture
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How to Profit From Real Estate Foreclosures

Profit from foreclosures is more than buying a property at a foreclosure auction for pennies and then reselling that property for a windfall gain the next day. There are other possibilities. In this article, we will consider three ways you can profit from foreclosures.

  1. Bid at the foreclosure sale
  2. Buy an REO from the lender
  3. Negotiate a sale with the distressed property owners

Before we dig in, though, let's consider foreclosure.

The Foreclosure Process

Foreclosure is the result of default. When borrowers fail to make their scheduled mortgage payments, for example, or when owners fail to pay their property taxes or some related obligation such as homeowners' association fees or special assessments, transfer a mortgaged property without lender approval, or undertake renovations that diminish the value of the property, because a contract is shirked, foreclosure can occur.

A legal "notice of default" or a "lawsuit to foreclose" (depending on the state) is typically filed to initiate a foreclosure. This formally announces to the property owners, other parties who may have legal claims against the owners or their property, and the public in general that legal action is moving forward to force a sale of the property. This notice is delivered to the borrower at least one month before a foreclosure sale (typically between 60 to 180 days) and subsequently posted on the Internet or in newspapers as public notice.

In response, the borrower can do several things to prevent or delay the foreclosure.

  1. Workout the loan with the lender and perhaps reinstate or even refinance their mortgage defaults
  2. File a legal defense against the lender and in turn drag the process into court and delay it for a year or longer
  3. File for bankruptcy and automatically stay the foreclosure action. In some situations, a bankruptcy court can even annul a foreclosure sale that has already occurred.

Okay, but with no loan workout, and when legal defenses or delaying tactics are ignored or run out, the foreclosure sale date arrives and the property is auctioned to the highest cash bidder. Thus bringing us to the first way you might profit from foreclosures.

The Foreclosure Sale

Though foreclosure sales typically lose money for lenders, lien holders, and property owners because foreclosed property sells at a price lower than market value, foreclosure auctions are not that easy because they are not a typical market value transaction.

No information about the property is given other than its legal description. You must pay cash. There is no "contingency" allowance for financing. The property is sold "as is" with no guarantees or assurances about the title, condition, environmental hazards, or even that the property will be conveyed free of occupants (you may inherit the owner, tenants, or squatters).

It's true that savvy bidders can turn big profits at foreclosure sales, but there is a caveat. Never bid blind at a foreclosure sale--you have to do your homework.


Lenders that win the bid at a foreclosure auction classify and sell the property as an REO ("real estate owned"). Thus bringing us to the second way you can profit from foreclosures--purchase an REO direct from a mortgage lender.

Since lenders often want to remove REOs from their books as quickly as possible, they may grant buyers favorable terms such as low or no closing costs, below-market interest rates, and low down payments. Moreover, when the property needs fix-up work, lenders are prone to accept offers at a discount price. Lenders don't give REOs away, but you can get good deals.

You can find REOs by attending and following up after foreclosure sales, or by contacting a real estate agent who markets REO listings.

Distressed Owners

Lastly, you can profit from foreclosures by buying property from distressed owners.

Divorce, job loss, accident, illness, business failure, and other setbacks do cause people to miss mortgage payments and get into foreclosure. You may be able to help them salvage their credit record and some equity, while at the same time secure a bargain for yourself.

But the "get rich in foreclosures" gurus greatly exaggerate the possibilities of profiting from property owners who face foreclosure. The reality is that when you talk with property owners in foreclosure, you're far more likely to uncover a minefield of problems requiring skill and creativity then a simple deal.

Owners in foreclosure, for example, often owe more than their properties are worth, meaning you must talk the lender into a "short sale". The lender must voluntarily reduce the balance due on its loan so that you receive a fair profit for agreeing to make up past-due payments and take over the loan. This is not easy.

Furthermore, many who face foreclosure contend with the claims of multiple creditors. You must be sure that none of those creditors has filed a lis pendens, or the IRS a tax lien. If so, you will have to clean it up to gain clear title.

Moreover, before you finalize a pre-foreclosure purchase with a property owner, thoroughly inspect the property and accurately estimate the costs of repairs and renovations. You surely cannot profit from foreclosures whenever you gloss over inspections and make only an eyeball guesstimate of expected costs.

Finally, bear in mind that someone facing foreclosure will not be an easy person to deal with. So don't act like a foreclosure shark. Rather than a "Here's my offer-take it or leave it" approach, develop a sensitive, empathetic, problem-solving approach. You're more likely to come up with a win-win agreement.

Here's to your success.

James Kobzeff is the developer of ProAPOD - leading real estate investment software solutions since 2000. Start working with rental property today. Discover how to create cash flow, rate of return, and profitability analysis presentations in minutes! Go to =>

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Swampmama3's picture
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Just for reader info...

A property I was interested in (my neighbor's place) went into foreclosure, then short sale, then sheriff's auction, then was a REO which I contracted on and am hopefully buying.  Here's the numbers on this individual case.

Original owner owed $122,000.  Realtor marketed the home for $130,000.  No interest was shown at that price.  The property was then appraised for $88,000.  Realtor adjusted the price to $90,000.  A few people came to look at it, but no offers.

Short sale period ended, and my neighbor had to move out.  Bank offered him $1,500 of he left peacefully by an agreed upon date and left the property clean and in good condition.

Property went to sheriff's sale at the courthouse, where it sold back to the bank for $48,333. 

My neighbor did indeed leave the place clean and in good condition, because he's a good fellow. 

New REO realtor listed the property for the bank at $84,900.  She said that this particular bank was pretty firm on what they would accept.  I told them the air conditioner was broken, which they hadn't taken into account during the original appraisal.  I knew that it was broken from talking with my neighbor, the original owner, and felt that it was indeed broken.

I offered $81,500 and was accepted. I could have offered less, I know.

I don't know what all this means to anybody, but I thought I'd provide some real-world, real-time numbers on the topic.

Ashley Hudgens's picture
Ashley Hudgens
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Joined: Oct 3 2014
Posts: 1
Home buyers who want a good

Home buyers who want a good deal in real estate invariably think first about pursuing foreclosures.
Sellers stop making payments for a host of reasons. Few choose to go into foreclosure voluntarily. It's often an unpredictable result from reasons like divorce, inability to continue working due to medical conditions, joblessness, excessive debt and mounting bill obligations, or job transfer to another state. The housing crisis brought to us by the country’s biggest bankers has stolen the dreams of the nearly 4 million families who have lost their homes to foreclosure since the housing crisis began in 2007.


Light-Stone's picture
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Joined: Jun 16 2014
Posts: 2
When it comes to making

When it comes to making profit from real estate investment David Lichtenstein is the investor to learn from, hands down. Couple of days ago I read a interview with him at Washington Post. In this interview David Lichtenstein speaks about the investments he made in the past years, from buying land to selling housing and much more... read the post and you'll get idea, if not at least you can learn something about your future investments in the real estate sector.

GoldFather's picture
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Joined: Dec 26 2014
Posts: 1
Trustee Sales

There are many avenues to profit from foreclosures. None of them are overnight investments you can sit around and watch come into fruition. You have to study and network with banks and government auction houses within your specific locale.

I person invest in real estate by attending trustee sales across the state of Nevada. Trustee sales are lucrative; however, you must know what you are getting into. Most of the houses sold are not in peak condition due to there tenants being forced to move out most likely against their will. You gotta have cash and you gotta out bid your competition. But there are resources which can help.

Jump in! It's hard work but worth it when it all pays off.

Great information in your post! I just wanted to add in my 2 cents wink

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