Jump in. The market’s cool

A downturn in the real estate market can be a great opportunity to find deep discounts on a home or investment property. And with foreclosures on the rise, interest rates ticking up and home price appreciation slowing, there is certainly evidence that such a downturn could be on its way — if not already in progress.

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Real estate bargains proliferate in a sluggish real estate market, and patient, savvy investors can make money in such a market, not to mention when the market recovers.

Four ways to find prime investment opportunities in a slumping real estate market:

Look for distress signals
The recent popularity of adjustable rate mortgages and other creative financing such as interest-only loans means more homeowners could be facing the prospect of ballooning monthly payments in the near future, making it tougher for those homeowners to avoid defaulting on their mortgage. You can find and contact owners in default by tracking public default notices.

While it’s not guaranteed that homeowners in default will want to sell their property, selling during this pre-foreclosure period is often the best choice for them to avoid losing the property at a public auction and having their credit marred by a foreclosure. And selling may be the only choice in a cooling market where homeowners don’t have as much home equity with which to work. That’s where you come in. As a buyer or investor you can often work out a purchase agreement benefiting the homeowner, the foreclosing lender and yourself.

Attend some auctions
As demand for housing slows down, homeowners in default have fewer options to stop the foreclosure process during the pre-foreclosure period, sending more properties to public foreclosure auctions. Experienced investors can often pick up auction properties at bargain-basement prices, but auctions also involve more risk than buying pre-foreclosure or bank-owned property so they should be pursued with extreme caution and careful research.

Note: some banks are now using the Internet to auction foreclosure property online. The bidding for each property is typically open for a period of several days or weeks.

Target bloated bank-owned inventories
Some foreclosure properties end up in the hands of the foreclosing bank if no third party places a high enough bid at the foreclosure auction or if a homeowner in default directly deeds a property to the bank during the pre-foreclosure period — a scenario more common when home price appreciation stagnates, leaving more homeowners “upside down” on their mortgages, owing more than their property is worth. Banks typically have no desire to hold onto these properties, known as bank-owned or REO properties, and may be willing to sell for a bargain price, especially if they have a large inventory of such properties on their books.

You can find bank-owned properties online, or you can call banks individually and ask if they have any properties for sale.

Buy directly from owners
There’s a debate about whether the number of For Sale by Owner properties will increase or decrease in a slumping housing market. But in either case, FSBO properties, when researched and negotiated carefully, represent a good opportunity to buy properties below market value because they cut out the expense of a real estate agent listing the property. While homeowners choose to sell this way so they can put more of the sale proceeds in their pockets, buyers can often benefit in the form of a discounted purchase price. That’s particularly true in slowly appreciating markets where inventory is high, giving buyers the upper hand.

Smart real estate investments involve motivated sellers and properties with fundamentally sound resale value or rental value. While you can find motivated sellers in any real estate market, they’re more common in a cooling market such as the one that many experts are predicting this year. And the foundational principles of resale and rental value remain the same in any type of housing market. So dip your toes in your local market and consider jumping in if it’s cool enough.

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