Are you currently in the market to buy a primary residence? If not, are you thinking about investing in Real Estate? If the answer to either question is "yes", then the thought of buying a foreclosure has probably crossed your mind.
I am frequently asked the following question in different forms, "Are foreclosures good investments"? Well, welcome to Foreclosure Investing 101! Unfortunately (and predictably), the answer to that question is it depends.
Those that describe buying a foreclosure now as a "no-brainer" are grossly negligent in their advice.
The most famous statistic being thrown around sounds like this, "Banks are willing to take 50% for their Real Estate Owned Properties".
That is a somewhat true statement.
It is acceptable for me to believe that banks are taking offers that are 50% for properties that they are taking back.
However, they may not necessarily be giving the properties away for 50% of what they are worth.
More often than not, banks may be willing to take 50% of what is owed on the property.
These are two hugely different things.
The first rule to understand when doing any valuation is to acknowledge that something is worth only what someone else is willing to pay for it.
I learned this lesson as a nine year old.
I bragged to my dad that I had 7 Wade Boggs Rookie baseball cards and that they were each worth $21.
Therefore, I had $147 worth of Wade Boggs Rookie cards.
He told me that he would believe it when I found a buyer for the cards.
I said that I didn't need to find a buyer, I knew that they were worth $21 apiece because that is what the "book" said (Topps used to put out a "valuation" book - I don't know if they still do).
Again, he challenged me to find a buyer.
Well, I took those cards to three or four baseball card trade shows and I couldn't find anyone to pay me more than four buck for each one.
How much are they worth? That's right, four bucks.
The same can be said for Real Estate and Foreclosures.
If that $350,000 house sells at auction for $175,000 then the new buyer bought it for 50%.
That is, he bought it for 50% of what was owed on it.
Or 50% of what it used to be worth.
However, he also paid 100% of what it is currently worth.
Value is a moment in time.
It is important to remember that real estate is a commodity and as a commodity, prices go up and prices go down.
When considering buying any commodity, understand where you are in the buying cycle.
It is definitely a wise time to buy real estate and foreclosures, for that matter.
Just understand that yesterday's values don't mean a thing today.