A foreclosure is a legal process that gives a creditor the right to recover on a loan secured by property that is in default. To initiate a foreclosure, the lender must file a Notice of Default, which is a public notice. The lender becomes the owner of the property securing the loan if the borrower defaults.
The foreclosure process can result in several different outcomes. If the borrower pays the amount in default within the grace period, (also called the pre-foreclosure period) the loan is reinstated and the borrower keeps his or her home. Grace periods are governed by state law.
Another possible outcome is that the borrower sells the property to a third party during the pre-foreclosure time period. The borrower will then pay off the loan with the proceeds and avoid losing the property in foreclosure.
If the pre-foreclosure period ends and the borrower has not repaid the amount in default, the lender can sell the property at an auction to recover on the loan.
The final outcome is that the lender becomes the owner of the property, either through a short sale or buying the property back if a property doesn’t sell at auction. In either case, the lender becomes the owner of the property. These properties are often referred to as Real Estate Owned properties (REO).
Real estate investors interested in buying foreclosures have investment opportunities at every point in the foreclosure process. In the pre-foreclosure period, after the lender has filed a Notice of Default, investors can purchase properties from borrowers who are looking to avoid foreclosure. A pre-foreclosure purchase can be advantageous for both the borrower and investor. The borrower can use the sale proceeds to pay off their loan and avoid foreclosure, and the investor can often purchase real estate at bargain prices while still having time to research the property and the property’s title.
Real estate investors can also buy foreclosure properties at a public auction by bidding on the properties. In this situation, the investor will be required to pay cash at the time of sale and will not have time to research the property or the property’s title. Investors can still find some great bargains purchasing foreclosures at public auction, but they involve a degree of risk due to the fact that opportunities to research the properties is limited.
Investors can also purchase foreclosures through a lender’s REO department. These properties are generally not as deeply discounted as properties bought at auction, but usually the lender will have cleared the title and done any needed repairs and maintenance which can make the REO properties attractive investments.