The Basic of Real Estate Foreclosure

A pre-foreclosure sale takes place between the time when the lender files suit and when the property is scheduled to be sold at a public foreclosure action or a trustee's sale. Here's an overview of the benefits of buying pre-foreclosure properties so you can contrast them with the disadvantages of the foreclosure and REO stages.

Benefits of Pre-Foreclosure

* Deep discounts
* Ability to research inspect property/more accurate value estimates
* Ability to avoid the potentially expensive bidding process
* Ability to structure sales agreements in a creative fashion
* Less hassle from third parties (lenders, etc.)
* The potential for minimum cash outlay

When institutions (banks, lenders, etc.) lend money to individuals for the purchase of a home or other property, they naturally expect to be paid back. They're in the business of lending money to make a profit. When borrowers (mortgagors) fail to meet their mortgage obligations, lenders want the property returned so they can re-sell it to others for a profit or at least reduce their losses. They regain the property through the foreclosure process.

Of course, both mortgagors and lenders will do their outmost to work out an agreement that will allow people to keep their homes and the lender to keep receiving payments. In addition, neither the mortgagors nor the lenders want the legal complications of the foreclosure process. Unfortunately for them -but fortunately for you!- they can't always work out an agreement, and the lenders have to initiate foreclosure proceedings.

So, how is the foreclosure process begun and what's involved in it? It's important for you to be aware that every state and county has different rules and regulations that you'll need to learn well. Otherwise, you may miss something or make a mistake than can cost you money. However, in general, every state within the U.S. uses one of two types of foreclosure-judicial and non-judicial.

This stage takes place after the property has been foreclosed, and it's been taken back by the lender. The term "REO" stands for "real estate owned." It's also commonly known as "OREO" (other real estate owned). Typically, there are many of these properties available on the market, and, on the face of it, they might look like bargains. But a closer look reveals some real roadblocks to making a profit:

Roadblock 1: Most are sold through real estate brokers. This means they're sold at full market value, so there's little incentive for you to purchase one because there's no real profit in it.

Roadblock 2: There are many rules you have to follow. Many lender-owned properties are HUD (Department of Housing and Urban Development) or DVA (Department of Veterans Affairs) homes. This means you'll need to follow a strict set of rules, rules that are enforced by the federal government. Plus, on other non-HUD and non-VA properties, you'll have to follow the rules set up by the lender. In short, you could be facing a lot of hassles, hassles that you won't face in the pre-foreclosure market.

Roadblock 3: You'll need verifiable proof of funds. As in the foreclosure stage, no one wants amateurs with no money slowing down the sale process, so you'll need to have funds on hand to pay the down payment and closing costs. You'll also need to prove that you've been pre-approved for a loan to finance the purchase.

Roadblock 4: You don't have the opportunity to do an inspection of important home systems. Many REO properties are vacant, and all important systems-electrical, heating/cooling, plumbing, natural gas, water, etc.-are turned off. This means you can't inspect these systems. Since they can be extremely expensive to repair, you definitely don't want to invest in a property without knowing their condition.

Roadblock 5: REO sales are final! All these sales are "as-is," so if there are problems with the property, you're stuck with them. Problems can range from environmental concerns (mold, asbestos, lead-based paint, etc.) to hidden structural damage. They can all be expensive to correct, and, legally, you have no opportunity to seek compensation from the seller.

From the above information, you can see why I feel the pre-foreclosure stage is the best area to target. It offers the greatest profit potential, the fewest hassles, and the least amount of risk.

Now, let's take a look at foreclosure through the eyes of the property owner so you can fully understand the options they have when facing foreclosure. This will help you to show them the benefits of working with you in the pre-foreclosure stage rather than undergoing the difficulties of foreclosure.

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