Foreclosure Investment Opportunties

The Foreclosure process provides for the lender of a property mortgage to recover the amount owed on a defaulted mortgage by selling or taking ownership [repossession] of the property securing the loan.

Preforeclosure

The first step in the foreclosure process begins when a borrower defaults on mortgage loan payments. The lender files a public default notice, called a Notice of Default or Lis Pendens.

The foreclosure process can end at this stage in one of four ways:

The borrower pays the default during a grace period determined by state law. At this point the loan is normally reinstated.
The borrower/owner sells the property to a third party during the pre-foreclosure period. The loan default is paid off using the proceeds of the sale. This prevents the borrower having a foreclosure on their 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. This is effected either through an agreement with the borrower during pre-foreclosure or by buying back the property at the public auction. This known as bank-owned or REO properties (Real Estate Owned by the Lender].

Foreclosure Investment Opportunities

This preforeclosure period and process provides three bargain investment opportunities on foreclosure properties.

Pre-Foreclosure [NOD, LIS]

Buying a property in pre-foreclosure is done by approaching the borrower and offering to buy the property outright, before the foreclosure auction. This is advantageous to both the property owner and buyer:

The owner [borrower] can settle the property debt, retain any surplus equity and avoid an adverse credit history.
The buyer has adequate time to research the title and condition of the property and can realize discounts of 20-40 percent below market value.

Auction [NTS, NFS]

If the loan is not reinstated by the end of the pre-foreclosure period, a public auction is held, allowing potential buyers can bid on the property.

Buyers are generally required to pay in cash at the auction and may not have a lot of time to research the title and condition of the property beforehand.

Sale of foreclosure properties at public auction can result in some great bargains and avoids the need to deal directly with the owner.

Bank-owned [REO]

With REO arrangements, the lender takes ownership of the property, either through an agreement with the owner during pre-foreclosure or at the public auction.

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], the bank foreclosures can become a government foreclosure.

In this case the government agency will be responsible for selling the property.

Whichever party takes ownership of the property, they will clear the title, perform any needed maintenance and repair, then re-sell the property to recover the unpaid loan amount.

The potential bargain for foreclosure investors on these REO homes is usually less than a pre-foreclosure or auction property.