Foreclosures or Repossessions as investments

Today, I’m going to turn our attention to repossessions, or foreclosures as they are known in the United States.  I am going to explain to potential investors what a foreclosure is, why it happens, and what the opportunity is that is before them.

For new investors, property repossessions, or foreclosures, are properties where the “homeowner”, cannot repay the loan, or mortgage, that they have on their property through their bank.  A mortgage, being a form of secured loan, means if the buyer/owner cannot make the monthly repayments as agreed, the bank can take the security, or foreclose/repossess.

“Repos” are a feature of a recession, or downmarket, and tend to rise in volume as more people become unemployed, or the cost of living rises to such an extent that the homeowner struggles to meet their monthly commitments.  An unfortunate situation most would agree but a real one it is.

Investing in Repos has become quite popular this time around, particularly as there is so much volume.  Why is this?  A quick history lesson:

In the last boom, the buy-to-let concept really took off, but it was the higher ratio of mortgage to deposit that meant any downturn would be felt more sharply.  In practical terms, instead of a 20% deposit and 80% mortgage, buyers were able to get as much as 105% mortgages with no money down.  This sounds great in principle, particularly if you are familiar with the concept of leverage (i.e. using someone else’s money to make you profit).

However, there is a major downside if the economy turns, as it did.  The larger the loan amount, the more difficult it is to repay if income reduces, the cost of living rises, or the level of debt (through credit cards) has exploded.  So this has led to a huge surge of repo properties hitting the market, not just in the UK, but the US as well.

So what does this mean for investors looking for a genuine investing route today?  Many of these properties can be picked up for less than full market value because the banks just want to get their money back.  Therefore, properties can be as much as 50% discounted from their Open Market Value (OMV), which gives investors the chance to generate a capital gain, even in a downmarket.  If you have some form of deposit to put down, the lower purchase price also means you are more likely to get a mortgage, as the monthly payments are more likely to be serviced.

Click here for a great introduction to foreclosures