What is Foreclosure?

Foreclosure is a process that allows a lender to recover the amount owed on a defaulted loan by selling or taking ownership (repossession) of the property securing the loan. The foreclosure process begins when a borrower/owner defaults on loan payments (usually mortgage payments) and the lender files a public default notice, called a Notice of Default or Lis Pendens. The foreclosure process can end one of four ways:

• The borrower/owner reinstates the loan by paying off the default amount during a grace period determined by state law. This grace period is also known as pre-foreclosure.
• The borrower/owner sells the property to a third party during the pre-foreclosure period. The sale allows the borrower/owner to pay off the loan and avoid having a foreclosure on his or her credit history.
• A third party buys the property at a public auction at the end of the pre-foreclosure period.
• The lender takes ownership of the property, usually with the intent to re-sell it on the open market. The lender can take ownership either through an agreement with the borrower/owner during pre-foreclosure or by buying back the property at the public auction. These properties are also known as bank-owned or REO properties (Real Estate Owned by the lender).

Foreclosure Opportunities

Pre-Foreclosure:

Buying a property in pre-foreclosure involves approaching the borrower/owner and offering to buy the property outright. The borrower/owner can walk away with the equity in the property and avoid a bad mark on his or her credit history. The buyer has time to research the title and condition of the property and can realize discounts of 20-40 percent below market value. CAUTION: Dealing directly with a seller at a time of stress can lead to many costly and undesirable situations. 1. Purchasing the home "over" value for the current market and market trend. 2. Purchasing a home with expensive and hidden conditions. 3. Sales price may not be high enough to cover liens on property. 4. Undisclosed liens. 5. Potential lawsuits from the seller, lender(s) or other interested parties.

Public Auction:

If the loan is not reinstated by the end of the pre-foreclosure period, potential buyers can bid on the property at a public auction. Buyers often are required to pay in cash at the auction and may not have much time to research the title and condition of the property beforehand; however, a public auction often offers some of the best bargains and avoids the unpredictability of dealing directly with the borrower/owner.
CAUTION: Auctions can get emotional and time is not on your side. 1. Purchases must be paid for in cash at the end of the auction. 2. What looks like a bargain on paper (auction price vs. original purchase price) may not be a bargain at all. 3. True market value may be unknown. 4. Condition of the property both now and when you get position of the property is unknown. 5. Getting actual possession of the property may require additional expenses and lengthy time periods.

Bank-Owned (a.k.a. REO):

If the lender takes ownership of the property, either through an agreement with the owner during pre-foreclosure or at the public auction, the lender will usually re-sell the property to recover the unpaid loan amount. The lender will typically clear the title and perform needed maintenance and repair; however, the discount for these REO homes is typically less than a pre-foreclosure or auction property discount. Bank foreclosures can become government foreclosures if the loan is backed by a government agency such as the Department of Housing and Urban Development (HUD) or the Department of Veterans Affairs (VA). In that case the government agency would be responsible for selling the property.
CAUTION: These properties are normally sold on the open market through a real estate agent. 1. Simply because the property was a foreclosed property does not mean it is listed or will sell below market value. 2. Many REO properties may be listed far below market value for the sole purpose of acquiring multiple offers which may lead to a final sales price considerably over current market price. 3. Most REO properties will be sold on a strict "As Is" basis.

Using an experienced and knowledgeable Realtor can save you tens of thousands of dollars and many costly mistakes. The only way to truly understand the real value of a property is to be able to compare it to similar properties currently on the market. comparing  price, condition, location and seller purchase requirements is the only way to put any purchase into perspective. I have been a successful full-time Realtor for 30 years. I can insure that you find the right home, at the right price, in the right condition without the risks of costly mistakes.