8 Facts about Understanding Foreclosure

by Jennifer Minge

RealtyTrac announced that foreclosures were up 14% in the second quarter of 2008 which is an increase of 121% over the second quarter of 2007. One in every 171 households in the US received a foreclosure filing during the quarter.

This increase in foreclosures has generated a potential gold mine for real estate investors. Before jumping on the foreclosure band wagon first understand the foreclosure process and how investors can capitalize on the increasing trend of bank foreclosures.
What is Foreclosure?
To purchase a property, buyers will obtain bank financing. If the homeowner fails to make their loan payment, the bank will foreclose. Foreclosure is a legal process that gives the bank ownership of the property.

Judicial versus Non-Judicial Foreclosure
Each state has laws that detail the foreclosure procedure. This process will either be a judicial or a non-judicial foreclosure.

Judicial Foreclosure
Judicial foreclosures require the bank to file a lawsuit and the foreclosure sale must be approved by a judge. The bank must send notification of the lawsuit by serving a summons to the homeowners, and filing a notice in the local legal newspaper. If the court rules the debt is valid, the bank is awarded a judgment and the court orders the property sold at public auction.

Non-Judicial Foreclosure
For non-judicial foreclosures the bank does not have to involve the court system. The bank is required to send the homeowners a notice of default. If the homeowner fails to bring the loan current, the bank will then send them a notice of sale which is also advertised in the local legal newspaper. After the legally required time period expires the bank can sell the property at public auction.

Opportunities to Purchase Foreclosures
Investors can purchase properties during the foreclosure process, at the public auction or from the bank which has taken possession of the property.

Pre-foreclosure
The legal newspaper will have listings of properties that are in foreclosure. Investors can approach the homeowners directly and attempt to purchase the property at a discounted price. Some homeowners will sell their property for their outstanding loan balance in exchange for not having a foreclosure on their credit report.

Public Auction
Public auctions are usually held on the first Tuesday of each month. The opening bid will be for the amount the bank is owed. Sales at public auction are almost always all cash purchases.

Bank Owned
If no one bids on the property at the public auction, the bank takes possession and the home becomes an REO or real estate owned. Buying REO property is usually the safest method because you can view the interior of the property, banks will provide clear title, and investors can utilize traditional financing. Banks will frequently sell the property below the amount owed since they do not want to own property.

Redemption Period
If an investor purchases a property at public auction they need to be aware of a redemption period. Almost half of the states provide for a redemption period which allows the homeowners to regain ownership of their house by paying an amount equal to the foreclosure price plus additional expenses. The redemption period can range from 30 days to one year.

Savvy real estate investors will take advantage of this rising tide of foreclosures to purchase properties well below market value. They can purchase the property at any time during the foreclosure process.