Bank foreclosures entice investors because of their potential to reap huge profits. However, investing in distressed properties carries a fair share of risk. If you want to be successful in this field of investing, it's imperative to do your homework and weigh all the pros and cons. Otherwise that below-cost property could quickly become a massive money pit.

Keep in mind most bank foreclosures are in need of repairs. Rarely will you find one in perfect condition. In order to spruce up the property you will either need to engage in physical labor or hire contractors to perform the work.

If you possess the know-how to do the work yourself, bank foreclosures requiring substantial renovations could potentially reap a higher profit. If you are not the handyman type, this type of investment property is probably not the best deal for you. The cost of hiring contractors to perform the work will quickly reduce your profit margin.

Investing in bank foreclosures is usually less risky than buying homes sold through auction. Professional investors able to pay cash for auction homes can generally negotiate decent deals. However, novice investors oftentimes end up paying more than the home is worth. Foreclosure houses frequently have creditor and tax liens attached. Buyers must be prepared to pay the mortgage note balance, accrued interest, attorney fees and attached liens. When all is said and done, the good deal could end up costing a small fortune.

When foreclosure real estate isn't sold at auction it is returned to the bank. Bank foreclosures are commonly referred to as real estate owned (REO) or bank owned. Some banks sell these distressed properties through their Loss Mitigation Department, while others use Realtors. Most banks desire to sell REO holdings quickly, but this does not mean they are willing to sell them for less than is owed on the bank note.

You might be fortunate enough to pick up an REO property for 90- to 95-percent of the note balance. In reality, expect to pay closer to 96- to 98-percent. In some instances, lenders won't budge a penny.

Before you make an offer, take time to thoroughly inspect the property. Houses that require substantial repairs usually have a wider range of negotiation. Plan on the bank providing a counter-offer as they rarely accept the first offer given. Depending on the location and condition of the property, several counter-offers may be required to reach an agreement.

One painful mistake novice investors make is they are prone to become so enthralled by a property they end up paying full price or more. When it comes to foreclosure property, you must be prepared to walk away if the bank is unwilling to negotiate. Keep your options open and realize there is a plentitude of houses waiting for new owners.

A lesser known, but highly profitable way to invest in bank foreclosures is to purchase them from private investors who specialize in buying bank REO portfolios. By purchasing in bulk, these mega-investors buy houses at wholesale. Some investors own hundreds of distressed properties they want to quickly dispose of. They are willing to pass along a significant portion of their savings, which provides the buyer with instant equity. It's not uncommon to purchase an REO property from an investor for seventy cents on the dollar.

Investors able to purchase distressed properties in cash can reap enormous profits. People involved in house-flipping find this option enticing. It allows them to quickly close the deal, make repairs and sell the house for profit within a matter of months. Paying cash upfront also appeals to investors looking for rental properties.

Investing in bank foreclosures can be gratifying and profitable. To be successful you simply need to educate yourself about the process, engage in due diligence, work with professionals, and know your limits.