Thinking about how to maximize leverage and reduce risk, I think Lease-Option would be a better strategy than buying in traditional way:

1) Find pre-foreclosure owners to negotiate a Option price that would make them happy when the option is exercised 2 years later. But this price is still about 20-30% below current market. In other word, high enough to get the owner out of default, low enough so that you may get a profit later.

2) Offer to lease(with option) from the owner for 1 year or 2 year for a good rent rate. You would turn around to lease the property to a real tenant at a market rent, hopefully getting positive cashflow. By the time the lease-option is over, you can exercize the option at a pre-set price. Hopefully, the market would also start to appreciate in price, you may be able to sell it at a much higher price then the option price.

Summary: You win by the spread between option price and then (1,2 years ago) market price. You may also win by appreciation between old market price and new market price.

The risk is low because when the lease is over, you don’t have to exercise the option.

What it really comes down to is using very small upfront cash to control the total value of the property at a minimum risk. The beauty is NO FINANCING is involved, yet you reach close to 100% leverage. We can potentially control the price for multiple houses. If one of them doesn’t work out, we simply walk way after the lease is over. The positive cash flow may be enough to compensate for the lost premium. The option premium can also be very small, down to $1 per option, or whichever amount to help the owner out of default.

Well, I think it may work better when the market is identified to be close to a new boom (this is in fact the hardest…). When the market is starting to move, it’s also the time foreclosure rate rises to the peak. Thus, I think opportunities will abound.