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If you want to make money in real estate, buying and selling foreclosed properties can be very profitable. When a homeowner defaults on their loan, the bank repossesses the property and resells it. Banks make money on the loan and lose money when holding properties, so they are very eager to sell once they are forced to foreclose. This can be a great opportunity for investors who are ready to buy.

The first step in buying foreclosed properties is to be prepared. You don't have to do this yourself. You can find a broker who has significant experience with REO properties to help you with your research. REO stands for 'real estate owned,' which is how banks refer to repossessed properties in their P&L statements. Most banks prefer to deal directly with real estate brokers, instead of selling REO's to the general public. Find out which real estate professionals work closely with banks. One way to find this out is by contacting title companies and asking whom they recommend.

A good real estate broker will also be able to determine if the REO is being sold at market value or less by bringing up 'comps' - comparable properties that have recently sold in the area. Sometimes banks don't discount REO's right away when they put them on the market. A broker will also help determine if the location is desirable or not, which is important in any real estate transaction.

Once you have found a property that you like, make sure it's really a good deal by ordering a professional home inspection. The best investments require simple cosmetic work to be ready for resale. Stay away from roof, foundation or piping problems. Look for properties that simply need new carpet, light landscaping, new countertops and paint. A local contractor can help you determine these costs.

If an REO is not selling quickly, a bank may consider a short-sale ' which means buying the property for less than what was owed on it. As mentioned earlier, banks are not in the real estate business. They want to sell REO's as quickly as possible. They may initially try to sell at market value, but if it doesn't sell after 30-60 days, they will lower the price. If it still doesn't sell, negotiate a short-sale.

Another option to consider is buying houses in pre-foreclosure. Depending on the state laws, banks are required to give the homeowner a window of time to sell their home before the foreclosure sale. This timeframe gives you an opportunity to contact the homeowner directly to purchase the property. In most cases, the homeowner is desperate to sell and may accept an offer for slightly over the amount of their loan. You can help the homeowner by giving them enough to move on and repair their financial situation.

Any good real estate deal will go quickly, especially foreclosures, so be prepared to move. You'll be able to spot deals faster if you know the area's housing market. Be sure to have your real estate team of professionals ready also, including title companies, brokers, and lenders. It is also recommended that you educate yourself as much as possible and work with a mentor before starting.