Investing in foreclosures is no doubt one of the best opportunities to make money in today's economy. As with any type of business venture, there are risks involved. Investing in foreclosed properties offers great opportunity to buy homes significantly under market, but there are some risks such as considerable research, under lying lien problems, long-term carrying costs and several others. If you are willing to take the chance on a property or two you may prosper in the end.

Foreclosed homes can be purchased at several stages. First is the pre-foreclosure phase, then the auction phase and finally the REO phase each of these presents their own set of pros and cons. Familiarize yourself with each of these different types of foreclosures, weigh the pros and cons for each, you may be able to avoid a costly mistakes and headaches through the process of investing in home foreclosures.

Take a look at the possible pros and cons at the various stages of a foreclosure:

Pre-Foreclosure Phase

This is the stage where the homeowner is still in control of the property. Although the loan is in default and the pressure from the lenders is just beginning. The homeowner is usually in a position to sell the property quickly and avoid the foreclosure process all together. This means hue savings and large potential profits for you.

Pros

20-40% discounts on the estimate value

Low or no down payment, due to the built in equity

Research and inspection opportunities

Sales agreements that are flexible

Cons

Home owner may not be reachable

Fierce competition, many investors are trying to buy these type foreclosures

Time to research documents and court filings

Undisclosed or underlying liens against the property

Auction Phase

Possibly the most profitable stage of a foreclosure. Auctioned properties usually offer the best potential profit when buying foreclosures. An auctioned property is sold during a public auction to the highest bidder. If you have done you, research these types of properties are sometimes sold way under market value.

Pros

Greater discounts can be as high as 35-50%

Great ROI, return on investment

Greater potential profit

Cons

Property inspection is generally not available

Postponed auctions mean valuable time lost and research wasted

Large down payments that must be paid at the time of auction

Incomplete research can cost you a lot of money

You may not win the auction at all

REO Phase

An REO occurs when the lender retains the property after the auction phase. If the bids are not high, enough during the auto the lender will bid on the property to seize control and resell it themselves. In most case, the property has no value to the lender until the house sells; in this case, the lender is usually motivated to sell the property fast.

Pros

Discounts of 5-18%

Clear title, free of all liens

Back taxes are up to date

Lenders may do the repairs, or offer additional discounts

Cons

Low ROI, return on investment

Research must be very through

Potential for loss in the end

When investing in real estate, especially in foreclosures there is great risk involved. While the potential to make a substantial profit in foreclosures you need to make sure that, you do your research and fully understand what your risks are. Properties that offer the greatest profit potential are often times the risky investments

The term "foreclosure" rarely has any positive feelings associated with it. And for good reason: foreclosures are always connected with times of financial difficulty. But for the real estate investor, foreclosure investing represents an opportunity to increase his or her profits while helping someone out of a tough spot at the same time.

What is a foreclosure?

A foreclosure refers to the process of reclaiming mortgaged property by the lender. Almost everyone must borrow some amount of money to purchase a home. The amount varies, but most lenders finance from 80 to 100 percent of the total cost of the property. The loan is called a mortgage, and the home buyer repays the mortgage over time. The total term of the loan can vary, but most buyers make monthly payments for a total of 15, 20 or even 30 years.

Sometimes a situation may arise in which the home buyer can no longer make monthly payments on time. This may be due to unexpected medical expenses, the loss of a job, or poor financial planning. It's usually in the best interest of the lender to continue the loan, but if the buyer misses too many payments and has no visible resources for getting current, the lender may be forced to begin the foreclosure process.

Foreclosures are possible because the property serves are collateral for the loan. In the mortgage agreement, both parties have agreed to certain conditions, including the return of the house to the lender when required payments aren't made.

What's the benefit of foreclosure investing?

Foreclosures are particularly attractive to real estate investors. Foreclosure investing lets you buy properties at bargain basement prices. The time and money you invest in foreclosure properties almost always have greater returns than normal real estate investing.

Foreclosure investing tends to have less competition. Foreclosure takes some extra work to locate, especially in the weeks before it actually goes up for public auction. If you're willing to do the research, you'll be able to find these below-market-price homes and face very little competition.

How can I profit from foreclosure investing?

There are at least three ways to profit from foreclosure investing. First, you may choose to keep the home after you purchase it. Buying a foreclosure usually gives you a large instant equity that you can borrow against for future real estate investments. Or, you may choose to rent out the home and provide yourself with a monthly income.

Another way to profit from foreclosure investing is to flip the foreclosure. Many foreclosures may need only a cosmetic makeover to really enhance their curb appeal. Then you can resell the property at full market value and pocket a tidy profit.

Foreclosure investing has the potential for higher profits than everyday real estate investing. Plus, if you can close the deal before the house goes up for public auction, you'll be providing real help for someone in a desperate financial situation. Foreclosure investing takes more research and follow-up, but the rewards are well worth it.