When you invest in real estate, it is not necessary to have a huge pile of cash and perfect credit to buy a house cheap and resell it for a profit (aka wholesaling). This holds true in the preforeclosure market. Preforeclosures are houses in the default phase of foreclosure; where the bank has filed initial foreclosure papers but the sheriff sale or trustee sale where the bank auctions off the property, or repossesses it if no-one buys at the auction, hasn't occurred yet. With few hundred dollars and some education/specialized knowledge you can buy a preforeclosed house at a substantial discount and resell it retail, picking up a relatively large profit check in the process.

When people are in default on their mortgage they have stopped making payments to the bank. So when you are negotiating with the seller, and the bank, right up until the point where you buy, no-one is making the payments. Depending on their interest rate, mortgage balance, equity in the house, condition of the house, you could offer to assume their mortgage. (You must make payments to the lender and not pocket the $ yourself). This is unethical and people that do this give the rest of investors a bad name!

If the seller wants to save their home, help them do a Reinstatement Plan, Repayment Plan, Loan Modification/Loan restructuring, Loan Refinance, Loan Forbearance, Partial Claim, Pre-Foreclosure Sale, Short Sale, Deed-in-Lieu of Foreclosure. You are going to need to know what these are... and after dealing with the lenders, you'll learn. Or contact your trusted investor/lender team member.

In general, real estate investing is contacting and talking "only" to motivated sellers, and avoiding all the rest. Sellers in preforeclosure are some of the most motivated sellers you will find. Their world has been turned upside-down, they are about to lose their house, and their motivation is such that they just want out of the house and the bank off their back. By buying houses from people in preforeclosure, creating 30%+ equity spreads on houses often in good condition is all possible. You must find a win-win solution for the seller, lender, and yourself and never let any one party be short of the outcome. It is called being ethical!

It has been said that investors take advantage of these folks. I believe there are folks that call themselves "investors" and makes bad choices to take advantage of people. The rest of ethical investors shall put you out of business.

Buying houses in preforeclosure allows you to take over the existing financing already in place with no qualifying needed. You can offer to take title to the property in a land trust, begin making payments on the existing mortgage(s) (again not pocketing the $ yourself); you still get all the tax advantages, appreciation, depreciation without any of the risk of being personally liable for the mortgage and the property.

The volatility of the market and the mortgage industry has caused a lot of foreclosures, and rising rates will cause more in coming years. If banks had to take back all of the properties that went into foreclosure the FDIC would shut them down. They know this, so they try not to take properties back they don't have to. Often by requesting the lender discount what is owed on their payoff, large spreads of equity can be created on houses that are totally "maxed out" with loans. This can't be done on loans not in default. Lenders are under pressure to liquidate bad loans rather than take the property back, so you can negotiate larger discounts.

There is no doubt that there are ways to make profits in real estate investing. Sure it is about the numbers, the location, the cash flow, but you won't get there if you don't have the principles and know how to treat the people.