Many consider foreclosures to be the most lucrative aspect of real estate
investing for several reasons:
1. Less competition—“underground.” The foreclosure marketplace is
often tagged as the “underground” of real estate investing as
opposed to the usual retail world of real estate. This means less
competition from retail or uneducated buyers.
2. Less competition—specialized knowledge. While you do not have to
be a brain surgeon to be successful in foreclosure investing, you
should have above-average acumen to understand the legal aspects
of foreclosures in the state (or states) in which you will be doing
business. (Each state has its own set of laws pertaining to foreclosures.)
Many investors and wanna-bes will be discouraged by the
additional complexity in the foreclosure business.
3. Overpaying and overleveraging in the retail market. In many parts of
the country, real estate has experienced a rapidly escalating market
in a relatively short time. In this type of market you have a frenzy of
buying, in which anxious and highly emotional retail buyers overpay
for properties and, in many cases, also overmortgage them. These
types of buyers often find themselves in over their heads with other
types of debts as well (e.g., leased automobiles and credit cards).
When the economy slows down and companies start to downsize,
these homeowners often lose their jobs. Recent substantial stock
market losses worsen this recessionary scenario even further.
Homeowners find themselves in a financial bind, unable to meet
to flip properties, you will follow the appropriate Goldmine strategies in
Section 41 and 42 and take the position that you are not a dealer and do
not start off as a corporation (with its many disadvantages). Instead,
start off as an LLC partnership (or as a limited partnership if your state
heavily taxes LLCs) as per Goldmine Section 6. Because you are taking
the Goldmine position that you are not a dealer, your flip profits will not
be subject to Social Security taxes. With a partnership as a pass-through
entity, you can also use rental losses from your keepers to offset the flip
profits to reduce income taxes in addition to the Social Security taxes.
Also, because you are taking the Goldmine position that you are not a
dealer, when you sell you can defer income taxes on the gain via a 1031
exchange (covered later). If you hold any of the financing, you can defer
income taxes on the gain via installment sale reporting