Considering Real Estate Investment Opportunity? Check Your Credit Report First!
Foreclosed Homes Can Be Good Investments
The foreclosure homes market, as you've probably noticed, has become something of a growth industry in the last year or so, and it's expected to rise even more in the coming months as the next wave of subprime, adjustable rate mortgages reaches maturity. While foreclosures are certainly bad news for the people who are defaulting on their home mortgages, they also offer a great opportunity for savvy real estate investors.
Real estate has always been among the surest and most lucrative investments available. A real estate purchase offers a tangible asset that, barring a natural disaster, can endure for generations. As populations grow and residential areas stretch from cities and suburbs into rural areas and beyond, the need for land and living quarters grows as well, driving up home and property values while offering returns on investments that outpace most mortgage rates in the long term.
From an investor's standpoint, the recent surge in bank foreclosures creates a buyer's market with vast potential. Due in part to the low federal interest rates imposed a few years ago, banks and other lenders extended subprime mortgages and/or zero-down financing to a wide range of people with poor credit history. These mortgages amounted to $600 billion in the U.S. in 2006, or 20.1% of the total mortgage market, a substantial rise from 5.4% in 2001.1
When the low initial interest rates of subprime mortgages kick into higher, often unaffordable rates, many homeowners have to scramble to pay off the mortgage. The timeline varies from state to state due to different foreclosure laws, but when a homeowner defaults on the loan, the institution holding the mortgage can begin foreclosure procedures. Because of the glut of subprime mortgages across the country, foreclosed properties are now flooding the market.
This rising tide of foreclosures allows smart investors an ideal opportunity. Homeowners on the verge of a bank foreclosure would rather sell their property (known as a "distressed property" in real estate lingo) for less than its market value than be forced to give it up for nothing. Lending institutions, meanwhile, don't want to own homes so much as they want to recoup the cost of their loans.
The combination of motivated sellers, disinterested owners, and increasing numbers of homes for sale has helped create a stagnant, and in some areas depressed, real estate market. As home prices hold steady or decrease, someone whose credit report and score qualifies him or her for favorable interest rates can find great deals on desirable properties across the country. There are foreclosure home listing services that help interested buyers find homes priced below their market value.
The catch to this real estate investment opportunity, if there is one, is that the credit market has tightened up in response to the numerous foreclosures. Therefore, an investor will need a solid credit history and credit score to qualify for a desirable interest rate on a mortgage or other loan. Checking your credit score is a good place to start to determine whether you can take advantage of this opportunity.