Editor's note: Bobbi Dempsey is the co-author of "The Complete Idiot's Guide to Buying Foreclosures."
While foreclosures wreak havoc on the finances of their victims, they also can be golden opportunities to buy.
In recent years foreclosed homes have become popular targets for real estate investors -- even novices have been lured by the dream of getting rich quick through foreclosure "flips."
How good -- or bad -- an idea is it to buy a foreclosure, given the current housing market?
Let's start with the bad news: Buying foreclosures for profit is now much less feasible and practical for the average Joe or the newbie investor than it was just a few short years ago. Many sources of easy financing are now just a memory, and with home prices dropping, the potential for a big profit in the short-term is not as great.
But with so much inventory to choose from at bargain prices, investors with available capital or ready financing -- combined with the financial wherewithal and patience to wait for housing prices to rise before trying to sell -- might want to consider buying foreclosures.
It boils down to supply and demand.
There's plenty of supply. Would-be investors have their pick of foreclosed homes -- often choosing from several different foreclosures on the same block.
The other side of the coin is demand. To make quick profits, the investor has to buy properties cheaply and then flip them quickly at a significant profit. The faster you can flip it -- at a profit over the cost of purchase, repair and updating -- the more money you will make.
Right now, demand is not so good for investors. The same low demand that makes foreclosed houses attractive because of low prices turns right around and bites the investor when the updated house is put back on the market. Buyers are scarce, demand is low. The flip often turns to flop.
Traditionally, investors flipped a lot of homes to first-time buyers, who didn't mind putting some sweat equity into a fixer-upper. They would also sell to people who had gotten approval for questionable subprime loans. In some cases, they would sell to people who wanted the properties as investments and planned to rent them out. Or, the investor might not sell the property and might decide to be a landlord himself.
Dwindling optionsBut now, loans are much tougher to get. Landlords now may be struggling to make their mortgage payments on properties they financed several years ago. And then there's the added burden of rising costs related to rental properties, such as soaring fuel prices and rising costs of construction materials needed for repairs.
What's more, the investor may be in a very crowded field. The popularity of TV shows featuring flippers who make nice profits after a few weeks of work has created the notion that anyone can do it. The veteran investor finds himself competing with a bunch of newcomers, all trying to unload rehabilitated foreclosures.