Rising rates of mortgage defaults and foreclosures R across the country are creating a mini-boom for sharp-eyed real estate investors who know how to spot and then rescue -- "distressed" properties.

Small-scale investors are picking up bargains in houses and condominiums from owners who need to bail out fast. Some of those sellers are individuals in deep financial trouble. But many are institutions--banks, S&Ls, corporations and condominium associations--who find themselves stuck (or about to be stuck) with real estate they're not prepared to own for very long.

Banks and S&Ls in many markets, for example, are beginning to bulge with portfolios of unwanted houses acquired through foreclosures. One of every 200 outstanding home loans is in foreclosure today, according to the Mortgage Bankers Association of America. One of every 20 loans is delinquent, with payments overdue for more than 30 days.

A growing number of condominium associations also find themselves having to take over units of owners who have defaulted on their condo fees. Condo associations hold liens against individual units in the project to guard against nonpayment of fees, and they take court action when defaults drag on for months and mount into the thousands of dollars.

They don't want to end up owning the units outright, however, and are often eager to locate somebody who'll step in on favorable terms. That somebody--whether he or she is stepping in to acquire a unit from a bank, condo association, builder or other owner--is the investor in distressed property.

It's a growing specialty within the real estate market, even for people who try their hand at it only on weekends, says Michael A. Joy, a successful distressed-property investor from Bowie. Joy owns and manages dozens of rental units acquired over the past 10 years. Some of his purchases of the past few months, though, carry prices and terms that sound more like the 1970s than the 1980s.

"This is an incredibly good time to buy houses if you know your market and what you're doing," he says. Sharp investors with relatively small amounts of cash can step into problem situations involving banks, builders and condo associations, and come away with terms they'd have thought impossible in an era of 17 percent mortgage rates.

For example, Joy recently contacted a condominium association in the Washington suburbs that was in the process of foreclosing on one of its member's units. The owner hadn't paid condo fees for 14 months for a total of $4,000, forcing the other owners in the building to pick up her tab.

After repeated warnings, the association took legal action. The group wrote to the mortgage lender holding the first deed of trust on the unit. The mortgage lender, it turned out, also was prepared to foreclose because the unit owner hadn't made payments on her 8 1/2 percent loan for more than a year.

Following foreclosure, the condo association took legal title to the $40,000, two-bedroom unit, but had no desire to hold onto the property. The deal Joy worked out with the mortgage lender and condo association not only solved their problems, but carried attractive terms for him.

Joy put up $4,000 cash to make the first deed of trust current, and assumed the loan at its original 8 1/2 percent fixed rate with more than 20 years to run. The association agreed to treat the $4,000 in uncollected condo fees as a second deed of trust carrying an 8 percent rate, with a graduated payment schedule over several years.

For a total cash investment of $4,000, exclusive of closing costs, Joy acquired a condominium valued at more than $40,000, rentable at $500 a month. Thanks to the single-digit mortgage rates, this translated to a $35-a-month positive cash flow before taxes. Figuring in accelerated depreciation under the 1981 tax law, Joy's annual percentage yields on his money will be well into the double digits, despite the tough economy. Opportunities like these are the keys to profitable real estate investing in 1982, Joy maintains. To stay abreast of the market, he regularly contacts lenders, builders, condo associations, realty brokers and private owners to let them know of his specialty.

He also advises investors to watch for public notices of deed-of-trust defaults and foreclosure sales, talk to owners of vacant houses (who are usually traceable at the local courthouse) and, most importantly, not be afraid to step into what looks like a complicated legal mess.

As long as the investor uses his or her limited cash to help solve other people's problems, and negotiates with skill, "you can walk away with houses you'll want to hold onto for years," Joy said.