Another approach is to find a fixer-upper home that's gone into foreclosure. The investor spends money to improve the property and then sells it, hopefully at a profit.

A third approach is purchasing a foreclosed property at a low price and immediately selling it at a higher price. This can be done by "taking back" a mortgage. For example, at foreclosure, a house worth $100,000 may be sold to an investor for $50,000. Say the investor puts down 10 percent and assumes or creates a new mortgage for $45,000. The investor then markets the home at a discount, perhaps $80,000, offering 100-percent seller financing.

Because the house being advertised for $80,000 is comparable to other homes in the area that are priced at $100,000, the investor will be pulling in bargain-hunting potential buyers. Once a new buyer is found, the investor will take a promissory note from the new purchaser for $80,000. The investor has now created a $35,000 note for himself. This is the difference between the $80,000 sale price and the investor's original $45,000 mortgage). The new buyer makes payments to the investor for an $80,000 loan, and the investor makes payments on the original $45,000 loan.

Here's an example of how this would work out in actual dollars. If the original loan is for $45,000 at 8 percent over 30 years, the principal and interest is $366.88 per month. The investor may charge a slightly higher interest rate to the new buyer since he's offering 100 percent financing. Let's say that works out to 9.5 percent over 30 years for the $80,000 loan. That would mean the monthly payment is $672.68. The profit to the investor is $306 per month. Over the course of the 30-year loan, that works out to $88,295 in interest and $30,000 in capital gains after the investor has paid his own interest on the first note for a total return of $118,295. That's a pretty good return for a mere initial investment of $5,000 toward the original down payment.

If you decide to take this third approach, remember that not all mortgages allow an owner to "wrap" a second mortgage onto the original loan. For most loans today, if the property is sold, the first trust must be paid off immediately. That's called a "due-on-sale" clause. Since Veterans Affairs (VA) allows wraparound financing, properties owned by the VA are popular with investors looking for this kind of deal.

If you decide to invest in foreclosure properties using any of these approaches, take some time to think it through and plan ahead.

First, if you're investing in foreclosure properties with a partner or spouse, make sure everyone involved understand how this form of investment works. The deals can be rewarding, but they also involve risks that typical homeowners don't face. Also, if you decide to become a landlord, you open yourself up to calls in the middle of the night from tenants.

The next most important step is to educate yourself. Foreclosed property investment deals involve many details that can't be covered in a short article like this one. Start by picking up a book from the library or bookstore, and make sure you're getting guidance from a reputable author. Also, many real estate agents or auctioneers who deal with these transactions on a regular basis would be willing to educate you further about foreclosure properties.

Third, be realistic, and realize there are risks and disadvantages to dealing with foreclosure properties. Not all foreclosed properties are good deals and not all are available at a discount. Your buyer could default on a loan. You could face a situation where you're unable to do wraparound financing. You might experience higher-than-expected repair costs, and you may be unable to resell the property without investing in costly repairs and remodeling. Dealing with tenants can be a pain: they may damage the property, pay the rent late, or skip out on rent altogether. Changes in interest rates may affect your profits, and even if you do make a profit, you'll have to pay taxes on it. Finally, if you focus solely on foreclosures, you may overlook other good investment opportunities. The list of potential drawbacks is long, and not every deal will make you a profit. Investing in foreclosures is not a sure bet.

Finally, don't go it alone. Make sure to get professional help and advice from brokers, lenders, attorneys, accountants, and home inspectors.