As home values continue to slump, foreclosures are swamping the market.  It may be a sad day for people who lost their homes; but for many real estate investment companies, it's the pot of gold at the end of the rainbow.

Real estate operates under the same premise as the stock market.  To make an investment profitable, you need to buy low and sell high.  This basic concept has eluded many Americans, especially the ones who are losing their homes in the recent subprime mortgage crisis.  For others, however, it's a golden opportunity.

Real estate investment companies ramping up

In Los Angeles, a multi-million dollar real estate investment firm recently announced that it will aggressively buy up real estate properties.  The firm, Dynasty Dynamics, is initiating what it calls a "bulk-buy" strategy, buying "major" properties at 30 to 40 percent below their market value, and then selling them at 80-99 percent of the value.  

On the other coast, another real estate investment firm, the Fifteen Group, will soon be spreading its wings.  Specializing in multi-family units, this outfit intends to use some of its liquidity to venture into all "asset classes," purchasing single-family homes real estate either from owners or lenders.

Foreclosures are for pros

Buying foreclosures is also similar to trading stocks.  Even though these properties tend to be undervalued, it requires a true professional to understand the right time to make a buy.  There are generally three buying opportunities for a foreclosure:

• The first stage is when a house has not yet been foreclosed upon and taken to auction.  At this point, homeowners can be approached by prospective buyers.  Because the homeowner is so heavily in debt, it's difficult for a buyer to pull any equity out of a deal.  The only chance a buyer has is to negotiate directly with a bank for a lower price. For the lender, it's an opportunity to remove very quickly a defaulted loan from their books.

• The second stage is an auction, when cash is required from the buyer.  Most individual buyers simply don't have the liquidity to buy a home at this point.  If you do have such liquidity, be sure you know exactly what you're buying.  

• In the third stage, a buyer can scoop up a property after the foreclosure auction.  This is where the larger real estate investment firms swing deals with lenders to clear properties off their books.  The properties may be in rough shape at this point, but it's the best time to get the most significantly discounted price.

Entering the foreclosure market is not recommended for the faint of heart, or for the inexperienced investor.  You need to be an expert at the foreclosure process, and you must also possess deep knowledge of the properties and the markets you're purchasing.  Like the stock market, there's tremendous potential, but only if you have the experience and the shrewd business savvy to make it happen.