Real Estate Investing

What is Foreclosure?
Foreclosure is the legal process that enables a lender to take possession of a property on a defaulted loan and selling or taking ownership to recover the amount owed on the loan. The foreclosure process begins when a borrower defaults on the loan by not making the agreed upon mortgage payments and the lender files a Lis Pendens or Notice of Default.

The foreclosure process usually ends in 1 of 4 ways:

• The defaulting borrower ends the foreclosure process by paying off the default amount during a re-instatement period determined by state law. This period is also known as pre-foreclosure.
• The defaulting borrower sells the property during the pre-foreclosure period. This sale can allow the borrower to payoff the defaulted loan and avoid having a foreclosure on their credit report.
• Someone buys the home at a public auction after the pre-foreclosure period.
• The lender takes ownership of the property, usually with the intent to sell it on the real estate market. This lender can take ownership either through an agreement with the borrower during pre-foreclosure, via a short sale foreclosure or by buying back the property at the public auction. Properties owned by the lender are also known as bank-owned or REO’s (Real Estate Owned).

The foreclosure process allows for 3 great opportunities for finding deals on foreclosure properties.

Pre-Foreclosure, Lis Pendens
Purchasing a property in pre-foreclosure involves dealing with the borrower and offering to buy the property prior to foreclosure . The borrower may or may not end up with something to show for the equity in the property and would avoid a negative mark on their credit report. This potential buyer has a set time to research the condition of the property and loan and can realize incredible discounts below market value. Understanding foreclosures is one of the first step for borrowers to stop foreclosure. It is also the first opportunity for investors to purchase foreclosure properties.

Public Sale/Auction
If the mortgage loan is not reinstated by the termination of the pre-foreclosure period, potential buyers have the opportunity to bid on the property at a public auction. Potential buyers are often required to pay in for the foreclosure in full with cash at the auction and most likely will not have the opportunity to research the title and condition of the property beforehand. Even though, a public auction usually offers some of the best deals on investment properties and avoids the problems associated with dealing directly with the borrower.

Bank-owned, Real Estate Owned(REO)
If the mortgage lender decides to take possession of the property, whether through an agreement with the defaulting owner during the pre-foreclosure phase or at a public auction, the mortgage lender will almost always want to sell the property to recover the outstanding loan amount. The lender will then give clear title and sometimes perform necessary maintenance and rehab. The potential deal for these bank owned properties is usually much lower than a pre-foreclosure or a property obtained at auction. Some foreclosures can become government owned foreclosures if the original loan was backed by a government agency such as the Department of Veterans Affairs (VA) or the Department of Housing and Urban Development (HUD) . In that case the respective government agency would be the ones responsible for selling the foreclosed property.

Things to consider prior to buying a foreclosure property
Be sure that you are armed with all of the foreclosure data that you will need to find and purchase foreclosed properties. You can start by searching online for foreclosure listings, there are several websites in our links section that can help you with this task. Many of which have pre-foreclosure and auction properties nationwide.