Foreclosure Process

Foreclosure is the legal proceeding by which a lender usually a bank or other secured creditor calls in a loan agreement a borrower has defaulted on.  They repossess or sell a parcel of real property due to default in payment of the promissory note (mortgage) which secured a lien on the property.  Foreclosures are rising in all parts of the U.S. fueled by slumping real estate prices and sales, higher payments of adjustable rate mortgages and economic distress.  These factors make it harder for homeowners to take out home equity lines of credit as a bail out mechanism.  Foreclosure investing when done by seasoned professionals can be a successful moneymaker, however it is risky.  The foreclosure process can be a long one sometimes ranging from a month or more to over a year.  Also you may be forced to evict a tenant you inherit with the property.  One of the main risk factors is that the overheated real estate market of the past several years has left fewer genuine deals available.  On a national level foreclosed properties sell for less than comparable homes.  However in hot metropolitan areas the discount is negligible.    The best deals are in cities where the economy is weak. 

Basically there are three ways to buy foreclosures:

1. Pre-foreclosure - Directly from the homeowner who has fallen behind on his mortgage but the home has not yet been seized by the bank.
2. REO (Real Estate Owned)- The bank has actually repossessed the home.
3. Public Auction - The property is auctioned and the highest bidder becomes the owner or is issued a deed.

Whatever the method they each involve their own different set of rules, regulations and pitfalls.  The biggest is that you will end up paying more than a home is actually worth.  Most experts agree that REOs aren't a good deal.  As well as very few of them becoming available most command close to market value.  These real estate sales are typically handled by real estate agents.  Banks are becoming more lenient with strapped homeowners these days sometimes reducing the rate on loans, stretching out terms or giving several months moratorium on payments.  Auctions present the biggest risk fator because you purchase the property sight unseen and are responsible for any taxes, liens or second mortgages still attached.  For those willing to jump into this market you will need a certain amount of funds.  Most auctions require a 10 to 20 percent cash deposit on the spot, the rest of the balance can be due in as little as a day's time.  You will need to decide what you are comfortable paying beforehand, not get tempted in the bidding process to change your decision.  Most importantly it's crucial that you research state laws beforehand and also know what comparable properties in the neighborhood are selling for.  The best deals can be had among pre-foreclosures.  It takes a certain fortitude and you must be willing to knock on stranger's doors and ask intimate questions.  There are websites that charge subscription fees that put together listings culled from court filings and other public documents of homeowners behind in their mortgage payments.  You can then contact the homeowner and negotiate directly.  Some investors who specialize in this market tap into a network of realtor contacts for this information.

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Foreclosure Laws