The number of foreclosures seem to have reached a record high over the last few months. To the inexperienced real estate investor, these foreclosures often appear very attractive. But are they really? The prospect of making a quick profit of 50% or more certainly is very appealing. But remember, that not everything that looks like gold is gold.

In a nutshell, a foreclosure is a legal procedure where a mortgage holder reclaims a property because there was a default on the loan. In some of the US states, there is ‘strict’ foreclosure option whereas the mortgagee has a certain period of time to bring his payments up to day, after which time, the property title reverts to the lender.

Once the foreclosure process has begun, it is very difficult to get involved. Trying to rescue the current owner thought partial or full ownership is ill-advised. You should keep in mind that in some cases, the mortgagee has a ‘right of redemption’, which means that he has a certain period of time to make back payments and reclaim title and possession of his property. To avoid getting stuck in the middle of complicated legal proceedings, look for properties where a Notice of Default has been issued.

It is common for foreclosed properties to be sold at auction. You should always avoid bidding blind on a property. First hand knowledge of the current condition of the property as well as its legal status is irreplaceable. Unless you are a seasoned real estate investor, never buy a property sight unseen. You should also keep in mind that foreclosed properties are sold as is. There is no warranties and no title insurance available.

To protect your investment and avoid costly surprises, always have a professional home inspection performed on the property. The property will most likely need some minor updating and cosmetic work however you need to know in advance if there are some serious issues such as a leaky roof, fire damage, foundation cracks, dated plumbing and electrical, etc. If such issues are present, the property may still be a good investment, particularly if you are looking for a fixer-upper. You should simply know ahead of time so you can discount your offer accordingly.

You may come across a ‘short sale’ deal on a foreclosed property. This simply means that the lender is willing to accept less money than the outstanding loan. In this case, the lender wants to cut his losses and move on as quickly as possible.

You may also come across a Real Estate Owned type of foreclosure. In this case, the lender owns the property. These properties can be auctioned but not bought. You should be very careful with this type of foreclosure even though there are some very good deal available.

Remember that information is power. The more you know, the better prepared you will be to jump on a solid opportunity when it comes along. Keep in mind that you should always have a home inspection and title search done on any foreclosed property you are considering. You need to factor any defect of encumbrances such as liens and past due taxes in your decision. However, with a little leg work and knowledge, you too can make money on foreclosures.