Ankle-high interest rates and low lending standards made everyone a property owner who cared to be one over the last few years. At the same time, all that loose money drove prices to the moon.

Home prices nationwide rose nearly 50 percent in the last five years – about twice the long-term average. The hottest markets – like parts of Nevada , Arizona , South Florida, California , Massachusetts , and New York – more than doubled.

It’s been one of the great real estate bull markets in U.S. history. But now the pendulum is swinging the other way. Money is getting tighter and prices are getting lower.

It’s a bad time to be a speculator. But it’s a good time to be a cash-flow, deep-value investor. In fact, we may be heading for one of the best times to buy foreclosures and pre-foreclosures since the S&L crisis of the early ’80s.

Across the nation, deals are surfacing …

It’s Turning Into a Buyer’s Market

In my neighborhood in South Florida , For Sale signs are popping up like dandelions after a spring rain. One block that went up about 400 percent in the last seven years now has more signs than a Sunday bazaar, each competing desperately with the next. One, in deep red, reads, “Price Just Reduced! Motivated Seller!”

Realtors once again are returning phone calls and even minding their manners. They’re also thinking about taking second jobs.

Sale prices are sticky and only inching down. But asking prices are like Kmart specials, constantly revised … to the downside.

But the real price movements are in foreclosures. Forced sales.

Until last year, people who hadn’t made a mortgage payment in months waited till the last minute to sell – confident that each passing month meant another 1 percent, 2 percent, or 3 percent added to their sales price. Now, each passing month may mean a drop in their sales price … and still no bids at all. Yet, their overdue loan is only growing. And the foreclosure date is fast approaching.

Earlier this month, The Wall Street Journal reported that February’s foreclosure numbers were up 68 percent over last year. Still, they’re near historical lows. That’s because prices have been on a strong uptrend for so long that desperate sellers were never that desperate. Now, that’s changing. Foreclosures could go much higher from here.

Easy Credit Leads to Hard Times

Since 2000, sub-prime lending has exploded from less than 140,000 loans nationwide to nearly 650,000. And many of those sub-prime borrowers “qualified” for their massive loans thanks to low introductory payments on adjustable-rate mortgages. These loans are about to cause big trouble for millions of cash-strapped homeowners.

According to Moody’s, more than $2 trillion of U.S. mortgage debt is coming up for interest rate resets this year and next. That’s about a quarter of all outstanding mortgages. And most of these rate increases won’t be just a few bucks here and there.

A division of First American Corp., one of the country’s largest title insurers, just did a study that concludes about 1.4 million households will face a payment jump of 50 percent or more once their initial low-payment period expires.

Overall, First American expects one in eight households that took on an adjustable rate loan in the last two years to default.

If you’ve been on the sidelines for the last few years, waiting for a good time to get into the real estate market, you may want to suit up. The next two years should present many deals for investors who have kept their wits and credit ratings about them.

In fact, even if you have no credit or cash, if you know how to find the deals and investors, you can make substantial profits from the Great Bubble Bust. But knowledge is key. It’s much rarer than capital in this loose-money world.

Get Educated

If you don’t yet have the knowledge, there are a few things you can do to start getting it.

First, let me start with a DON’T.

DON’T … as in DO NOT … just go out and buy a property “on the courthouse steps” if you’re new to foreclosures. This is a game that should be played only by knowledgeable and experienced investors.

At auction, you often see properties on offer that no one has gotten a chance to see from the inside, let alone had a professional building inspector look at. You also have to make sure the auction will wipe out all other liens. If the holder of a second mortgage is the foreclosing party, you may think you got a good deal. Instead, you may end up with an overpriced deal, a huge new loan to pay (the first mortgage) … and you could be facing foreclosure on the same property yourself soon.

Then, there may be code violations. Have you checked them out? Have you spoken with the municipality about whether they’ll forgive those violations if you remedy them … or at least negotiate them down? Is there a mechanic’s lien or tax lien on the property as well?

Buying at foreclosure can be very profitable. But only if you have a system set up whereby you have a way to check all your title issues, legal issues … and buy at enough of a discount to market value that you can be prepared for nasty surprises inside the structure.

The best way to buy foreclosures is to buy them before they get to auction. These deals are called “pre-foreclosures.” And they can give you enough time to do your due diligence … to help a property owner salvage some equity and his credit … and to walk away with a property bought at a very good price.

Other profitable and less risky ways to buy foreclosures include buying directly from banks that have taken properties back (REOs) and buying wholesale from experienced foreclosure investors.

In all of these situations, however, get educated first about your local real estate values and how the various processes work. You can start by going to a foreclosure auction … not to bid, but just to learn. Bring business cards with you, and hand them out to the experienced investors who are buying the foreclosures. If they wholesale, let them know you might be interested in buying properties from them.

Also, join local real estate clubs and get to know – and learn from – other investors. Keep an eye out for seminars and conferences given by experienced foreclosure investors. Line up your credit lines and/or begin to assemble your own network of investors. These are people who have the financial wherewithal to fund your deals entirely, provide the down payment, or help you qualify for a loan for the rest of the purchase price.

“If you go into what I call a bubble boom, every bubble bursts.”- Margaret Thatcher

(Ed. Note: Justin Ford, ETR’s real estate expert, is the editor of Main Street Millionaire, our Real Estate Investment Success Program)

Justin Ford is an active investor in real estate and global stock markets. He is also a veteran financial writer. He has published, edited and written for over a dozen international investment newsletters, including launching the US version of the Fleet Street Letter, the oldest continuously published newsletter in the English Language. He is the author of Seeds of Wealth, a program for getting children to adopt good money habits from an early age. He is the editor of the Seeds of Wealth Quarterly Investment Update Bulletin. He is a contributing editor and author to a number of books on personal finance, including Michael Masterson's Automatic Wealth and Dr. Van Tharp's Safe Strategies for Financial Freedom.

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