Before you decide to invest in a foreclosed home, you should familiarize yourself with both the advantages and disadvantages of this type of property investment. Knowing what youre getting into ahead of time may just save you a lot of hassles and headaches down the road.

There are three foreclosure phases where it is possible to purchase a financially distressed property. These phases include the pre-foreclosure phase, the auction phase, and the REO (real estate owned) phase. Following you will find a description of the three phases along with the pros and cons for each.

The Pre-foreclosure Phase

This is the phase where the owner of the real estate still has control. He has defaulted on his loan and is facing pressure from his lender to pay up or face the consequences. He is desperate to sell the property and clear his credit; this could add up to big savings for you.

Pros

Discounts from 20 to 35 percent

Low down payment

Opportunity to inspect and research property

Flexible sales agreements

Cons

Absent or unreachable property owner

Tough competition

A great deal of courthouse research

There may be liens on the property

The Auction Phase

This is where the most money can be made buying foreclosed homes. At auction, the foreclosed property is sold to the highest bidder. If you do your homework before hand, you could realistically buy a property for a fraction of its value.

Pros

Discounts from 34 to 45 percent

Excellent return on investment

Highest profit potential

Cons

Not able to inspect property

Auctions can be postponed

Need large cash down payment at auction

Improper research can lead to disaster

Could invest a lot of time and still not win the property

The REO Phase

The REO phase occurs when the lender seizes control of the property in order to resell it and cut its losses. Since the property has no value to the lender unless it sells, the lender is often extremely motivated to make a quick sale.

Pros

Discounts from 5 to 15 percent

Title free from liens

Tax arrearages paid

Lender may do repairs or offer discount for repairs

Cons

Low return on investment

Remember; when you invest in real estate, there is a certain amount of risk that you must take in order to make a profit. This means that the properties that offer the most potential returns are the most risky. Be sure to calculate how much risk you can afford to take before investing in foreclosed homes.