The residential foreclosure market is not going to improve any time soon. However, there is an upside to these as real estate investments.  

Currently, the banks have 900,000 foreclosed houses on their books. That means they have title to them and are able to put them on the market. However, only about 1/3 are actually listed for sale. That leaves 600,000 bank owned houses that need to work through the market. 

The oversupply doesn’t stop there. Another 1.2 million houses are at some stage of the foreclosure process. In many cases, lenders have slowed the process because they don’t want more inventory on their books right now. They know bringing more foreclosures onto the market will force prices even lower with little chance of making more sales. The logic is to keep the owners in place to perform some level of maintenance rather than let a vacant house deteriorate. 

All of these foreclosures amount to at least a 2-year backlog that needs to work through the market before it returns to what we consider a “normal” market. 

The good news for those looking for good real estate investments is that banks are listing these properties with an average price 35% below market comparables. That is just the beginning price. Because of market conditions, there is still room to negotiate the price lower. Some markets like Phoenix are seeing prices down 75% compared to 2006. It’s mostly all upside with no downside for those taking advantage of these real estate investments. 

Experts confirm that a double dip recession has occurred in the residential real estate market. Nationally, house values are expected to drop another 5% during 2011. However, because the banks are bringing foreclosures onto the market in a controlled manner, prices are expected to stabilize next year. 

If you are interested in adding these properties to your real estate investments portfolio, you have two choices. You can wait to see if prices continue declining the remainder of this year and try timing the bottom of the market. Or you can take your time in today’s market cherry picking what is currently available. 

Jim Gillespie, CEO of Coldwell Banker Real Estate reports there is a growing demand for these real estate investments but the supply is much larger than the demand. However, he also reports that when the best bargains hit the market, they sell relatively fast because they are priced so aggressively. 

On top of the 1.2 million houses currently in some stage of delinquency, there are another 4 million that while not yet in foreclosure, are in some stage of delinquency with the mortgage. The foreclosure market is going to continue for a long time to come. 

If you really want to pick up residential real estate investments at rock bottom prices, here is a strategy that works well. Look for foreclosures that have been on the market 90 days or longer. It’s very common to find houses languishing on the market for 120 days. Also, look for ones that have had the price reduced several times. Finally, see if you can combine those attributes with a house that has had an offer accepted but didn’t complete escrow for some reason. This is a formula for finding a very motivated seller in today’s foreclosure market. 

Whatever you decide to do in today’s foreclosure market, I only hope that five years from now, you don’t look back saying “dang, I wish I had made more residential real estate investments in 2011.”