Unfortunately, you can’t always find the deals before they go into foreclosure. Some investors try to purchase foreclosed properties at real estate auctions or sheriff’s sales. I tend to avoid those. When purchasing a home at an auction there are several factors that can work against you such as very tight time constraints and a limited ability to inspect the property.

If a property doesn’t sell at auction then the mortgage holder, usually a bank, is stuck with the property. The property is now known an REO, or Real Estate Owned. I found a great article that I’d like to share about “The Advantages of Buying REO Properties – Real Estate Owned Properties.”

Here’s what the Author has to say:

• All liens against the property are removed once it becomes an REO, and taxes are paid.
• Unlike properties at foreclosure auction, REOs can be inspected prior to contract, and are listed with real estate agents.
• While many foreclosures are often in deplorable condition, REOs are typically restored to at least a readily salable condition by the lending bank.
• The bank or lending institution that owns the property will often offer financing with better deals then they would offer on traditional properties.
• The bank or lender that owns the property will often provide an allowance for certain repairs.
• You can save money in your title search if you use the same title company that the lender used during foreclosure. They will often discount the cost up to as much as 100%!
• REO properties are usually listed on your local MLS (multiple listing service), or can be located by going directly to your local REO bank’s website.
• REOs will often times include appliances
• While in hot markets, you may not see a difference in price between an REO and a typical property, during slower markets, you can pick up an REO at discounts to the property’s actual value.

Checkout the rest of the article here.

Why Has It Been So Hot?
With the housing market boom over the last several years, people have seen incredible returns in their real estate portfolio. The cable channels are flooded with shows about ‘flipping houses.’ We see every day people making six figures with what seems like minimal work.

Because of all this, real estate looks to be a safe, secure investment. We see people like Carleton Sheets and Robert Kiyosaki that have supposedly made millions from real estate. Everywhere we turn, we see people making money in real estate.

What’s The Truth?
We constantly hear reports of people making ridiculous returns on their investments, however, what we don’t hear is how many people have lost their shirts playing the same game. Real estate investing can be incredibly risky unless you are very well informed. People like Carleton Sheets make more money selling their programs than from actually practicing what they preach. Everyone may be in real estate, but everyone isn’t making money.

Try This With Your Stock Broker
What would your stock broker say if you brought him $10,000 and wanted to buy $100,000 in Google. Even with an aggressive margin account, that would never be happen! Here the great thing about real estate, that same scenario happens every day! In fact putting only 10%-20% down on a property is the norm. In real estate, you get the benefit or using other people’s money.

Real Estate Is Tangible
One reason many people prefer to invest in real estate over equity markets is that real estate is tangible. You can touch it. If you own shares of XYZ company, the best that you can get is a quote on your screen. I like being able to drive to a house and say that I own it. It makes me feel more secure. I feel like I have more control when I can reach out and touch something physical.

Less Risk = Greater Return
When done correctly, you can achieve much better returns in real estate than you can on wall street without additional risk. In fact, I would argue that you can achieve better returns with less risk. Try getting insurance on your stock portfolio. It will never happen because insurance companies know that real estate is a much safer investment.

It’s Not Rocket Science
The last and the best advantage of all is that you don’t have to be a Warren Buffet to make good money in this ring. When trying to make money in the stock market, you need to understand technical and fundamental analysis techniques. You need to understand things like inventory turnover, daily sales ratios, bollinger bands, and historic trends.

In real estate, it’s a much simpler process. If you have a good real estate agent and you can understand a basic financial sheet, then you are set. A good Realtor can help you with everything else.

Get Rich Quick (or not…)
Real estate can be a very good investment if done properly. But here’s the caveat: real estate is a long term investment. That doesn’t mean that you have to hold the same property for 60 years, but it does mean that you shouldn’t go into it expecting to make a small fortune overnight. The majority of the time, people that are making serious cash in real estate either had a lot of money to start with or they’ve been systematically investing for many years. Real estate is not a get rich quick game.

I’ve laid out some vary basic options that one could choose from in determining their optimal asset allocation.

Let’s define several of the major investments:

• [tag]Large Cap Stocks[/tag] – These are shares issued by large corporations with a [tag]market capitalization[/tag] of $10 billion or greater. The big players like Microsoft ($293 Billion) and Google ($140 Billion) are in this group.

• [tag]Mid Cap Stocks[/tag] – These are shares issued by corporations with a market capitalization between $2 billion and $10 billion. Companies like Rent-A-Center ($2.07 Billion) and Sherwin Williams ($8.57 billion) fall into this category.

• [tag]Small Cap Stocks[/tag] – The last group contains shares issued by corporations with a market capitalization of less than $2 billion. Some companies in this category are Sonic ($1.67 Billion) and Six Flags ($494 Million.)

• [tag]International Securities[/tag] – These are exactly what they sound like, securities from foreign companies. They can be good for diversification, however the risk will most likely be higher. Examples of foreign companies would be Samsung Electronics traded on the KOSPI and Japan Tobacco traded on the Nikkei.

• [tag]Emerging Markets[/tag] – High risk, high return investments in a developing country. Some popular emerging markets are Brazil, and Chile.

• [tag]Bonds[/tag] and other [tag]Fixed Income[/tag] Securities – Debt securities that generally pay the holder a set interest amount at set intervals or at maturity. In addition, the principal is repaid at maturity. These can be safer investments due to the fixed income, however this is still a risk of default by the issuer. Examples of fixed income securities are corporate bonds, U.S. treasury bonds, municipal bonds, long-term certificates of deposit (CDs) or any other debt security with a maturity date greater than 1 year.

• [tag]Money Markets[/tag] – Highly liquid debt securities with a maturity date of less than one year. Examples would include short-term CDs, corporate paper, treasury bills (t-bills) and savings accounts. These are generally safer due to their liquid nature.

• [tag]Real-Estate Investment Trusts[/tag] ([tag]REITs[/tag]) – Investments that are very similar to other equities with the exception that the investor is purchasing ownership is a pool of properties or mortgages rather than a corporation. These have wildly popular due to the incredible returns they’ve had during this last real estate boom.

Personally, I like small cap stocks and REITs. They’re some of the riskier choices, but your portfolio needs some risk until you begin creeping up on retirement.

What are your thoughts? What do you like to invest in and why?

Enter 2007.

The Housing Market Will Normalize – Some areas will see growth, some will see prices come back down to where they should be. According to the article “Best and Worst Real Estate Markets” there will some spots that are hot and some that are not.

If you happen to live in the northeast, your market looks to be fairly steady with a few hot spots and a few cool spots, ranging from a projected 4.8% growth in Syracuse, N.Y. to a -3.6% drop in Poughkeepsie, N.Y.

If you reside in the south, congratulations, you are home 12 of the 20 hot spots for 2007. The big winner is the area around McAllen, TX with a predicted growth rate of 8.5%. However, if you happen to be in Florida, watch out. You could see housing prices fall by as much as 5%.

How about the midwest? Well, it’s about as exciting there as it was in the boom market last year. It doesn’t really have any losers, just a pretty steady growth rate around 2.5%-3%.

And finally, the big boys, the west coast. You’ve had your fun over the last few years seeing enormous growth and over inflation of housing prices. Now, it’s time to pay the piper. You could see housing prices deflate by as much as 6%. In short, if it was hot last year, it won’t be this year.

The Equity Markets Will See Steady Growth – BusinessWeek believes that Optimism Reigns in 2007. Companies have shown tremendous growth over the last several quarters. We’ve seen double digit growth out of some giant blue chip companies. We’ve seen nearly 13% growth out of the S&P 500 in 2006.

Is this growth sustainable? Well, in the short term, we may see the markets decline as earnings normalize and the slumping housing market starts to take effect on the economy. However, by mid-year 2007 I see a very normal growth rate returning to the market. Consumers are optimistic, incomes have been growing while inflation has been relatively low. This leads to more disposable income. Some of which will be pumped back into the economy.

Don’t look for recored setting growth, but do expect to earn a respectable return on your investments.

2007, I believe, will be a brighter year. Markets will begin to normalize and the economy will continue to level off. Crime rates will drop, crooks will repent, the rain forest will re-grow and the ozone layer will improve…alright, maybe that’s a little too optimistic. But seriously, 2007 will be a better year.

There are 4 basic areas where you can park your money:

1) Checking Accounts – A bank account in which checks may be written against amounts on deposit. (Answers.com) Because of the liquidity of this account, few banks, if any, will pay you interest unless you have a load of cash sitting in them. The exception to the rule is that many online banks are beginning to pay interest on their checking accounts. However, the fees will probably eat up whatever interest you may earn. Here is a look at what online banks are currently offering.

2) Savings Accounts – The traditional alternative to hiding your money under the mattress. This is where most people put the money that isn’t in their checking account. Most brick and mortar banks pay minuscule amounts on these accounts. I think my bank gives me something in the neighborhood on 1%. If you like the idea of a savings account but are looking to earn a little more interest then you might like the idea of a money market account.

3) Money Market Accounts (MMAs) – These are becoming more and more popular, especially as online banking becomes more popular. The interest rates are higher, but there are a few limitations. Generally, these accounts limit the amount of transactions you can make per month. They also will generally require you deposit $500-$1000 to open the account, although you can generally keep less than that in there once it’s open. This type off account is what I use until I can move money into my IRA or some other investment. You can see the top rates here, but personally I prefer ING Direct. If you’d like to learn more about money market accounts, take a look at How do money market accounts work?

4) Certificate of Deposits (CDs) – According to the Free Financial Dictionary, CDs “are a savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified interest rate and can be issued in any denomination. CDs are generally issued by commercial banks.” This was your grandpa’s idea of a safe long term investment. For an individual, I really don’t see much of a use for these. I don’t like having my money tied up for long periods of time where there are, in my opinion, much better investments out there that are nearly as safe but have a much better return. But, if you’re still in love with CDs, you might like this article from Money Magazine.

Agree? Disagree? Leave me a comment and let me know your thoughts.