The Challenges of Investing in Foreclosures

Bank-owned bargains have become increasingly lucrative for real estate investors, but obstacles remain.

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Despite the increasing popularity of investing in distressed properties, experts say there are still not enough buyers to flush through the stock of foreclosures, a nagging problem which is slowing the recovery in the housing market. "Buyer interest remains strong, but the interest isn't high enough to burn through the inventory out there," says Rick Sharga, senior vice president of RealtyTrac. "We have a two year supply of [bank-owned properties] to go through before we exhaust the current inventory."

Experts expect even more distressed properties to pour into the market over the next few years, further inflating an already bloated home supply and depressing prices. Homeowners may have to wait until 2014 to see any flickers of life return to the moribund housing market, a recent joint survey by Trulia and RealtyTrac reported. That's a full two years later than last year's survey, which predicted a housing recovery in 2012.

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"I'd love to say we've taken a few steps forward, but the reality is we're actually backtracking," says Pete Flint, CEO of Trulia. "Foreclosures continue to be a major part of the housing market and as a direct result, home prices across America continue to drop."

Of the 900,000 bank-owned homes on the books, less than 30 percent are actually listed for sale, according to Sharga, which means there's a backlog of more than 600,000 bank properties yet to reach the market. Another 1.2 million homes are at some stage of foreclosure, of which only 20 percent are listed for sale. On top of that, an additional four million properties, while not in foreclosure, are in some stage of delinquency.

"It really is a difficult time for the housing market," Sharga says. "What we're looking at is the foreclosure market not dropping off, but beginning to flat-line and stay at very high levels through 2012 and into 2013."

Twitter: @mmhandley