Distressed Real Estate Investing 101

As someone with a Masters Degree in Real Estate from Columbia University who also has first-hand knowledge investing in distressed real estate, I'm frequently asked by people how to make their fortune in today's difficult real estate environment. With the market's decline due to the economic crisis there are once in a lifetime opportunities to be had. For those that really know what they are doing, a financial killing can be made in foreclosure, REO and Short Sale properties. But where do you start? Read this article and you'll be on your way.

We begin with understanding the different distressed real estate types. There are primarily three distressed situations that exist in the residential property market. These are foreclosures, REO or 'Real Estate Owned', and Short Sale Properties. Once you understand the relationship and differences between these types you can then develop strategies to take advantage of various scenarios and situations.

Foreclosure Properties

The most commonly heard of distressed property type is the foreclosure. A foreclosure is a property in which the bank has initiated a process of taking back ownership of a property from a private party. This usually occurs when a home's owner has fallen behind on his mortgage and can no longer afford to make payments yet has a balance left on his note.

The usual goal of a foreclosure is for a bank to take possession and then recover their liabilities by putting through an auction process held by the court. During the foreclosure process the bank's name replaces the owner's on the title of the property. Foreclosure is a specific legal process that has various stages and time periods.

At various times during the process the owner may maintain ownership of the property if they can continue making payments on the note. Due to the nature of this process there is also ample opportunity for savvy investors to come in and negotiate to take over the property. Techniques to do this and how best to approach it I'll cover in another article.

REO Properties

An REO or 'Real Estate Owned' property is one that has been foreclosed upon and thus is owned by the bank. Typically this is because the property did not sell during the foreclosure auction because the value of the asset does not cover its liabilities. Sometimes it is simply not wanted by anyone because a variety of reasons including the physical condition or location of the property and other times the actual property is simply not worth enough to cover the existing note on the property. Usually this means that the property was not a great investment, otherwise someone would have found enough value in it to make a purchase during the Foreclosure Trustee Sale.

After a property becomes an REO, it is typically put back up for sale by a realtor just as if it were for sale by a private party. First, however, the bank goes through the work of clearing existing liens and other obligations to make a 'clean title'. REO properties can be an opportunity to get a great value because often they can be purchased for less than if someone were to bid on the foreclosure auction where a minimum value is necessitated to cover the existing liability on the property.

In addition, the bank has gone through the process of making sure title is cleared which is something that is not done during foreclosure. Finally, banks are not in the business of 'managing' properties and are often eager to unload them for less so they can avoid the continuing maintenance and administrative costs. There are other reasons why REO properties can be great opportunities which you can read about on my site.

Short Sale Properties

Finally, there is another kind of distressed situation called a Short Sale Property. In a Short Sale situation the value of a property won't cover the loan that is on the property. The property has not yet entered foreclosure and the seller is usually in a situation where they need to be 'bailed out'. In a Short Sale, a lender or bank will agree to take less than the full amount to satisfy the debt. While it might seem counter-intuitive, the reason this sometimes happens is because it is often less trouble for a bank to take a slight loss on a property than to go through the entire process of foreclosure with the impending risks, complications and costs involved not to mention the time wasted.

Now that you understand the three primary distressed opportunities available for the savvy investor you can find much more detail about each and learn specific strategies needed to make a killing in these properties at my site www.PropertyWorkouts.com.