It is very common, when someone is interested in buying a new property, to question whether they should also look for foreclosures, and to wonder if they are in fact a good bargain. In the past few years, there have been a large number of foreclosed homes in the market, providing real opportunity for those who “flip” homes, by fixing them up and selling them for a profit, or creating a rental property for revenue.
While a foreclosure may be a wonderful find for the buyer, it is a sad loss for the seller, who actually loses the property through a process in which a bank or a mortgage company takes it back to satisfy the debt on the property. The owners lose their right to the property, and the lien holder might actually take ownership, or may have the property sold to pay off the loan.
Before the property is taken from the owners, it goes through a few different stages.
Stage 1 – Pre-foreclosure
At this point, the property owner is given legal notice that the process is starting, since he has missed a few mortgage payments. A Notice of Default is sent and a Lis Pendans is placed on the property until payments are corrected and owner cures the default. At this point, selling this property will not damage the owners credit history, and to purchase this property in the pre-foreclosure state can only be done by approaching a seller directly before it is listed for sale and offering to buy outright.
Stage 2 – Foreclosure Auction
If the owner does not pay back the loan to avoid foreclosure, or the loan is not reinstated, the property will be sold at a foreclosure auction, where bidders must pay cash to satisfy the debt, leaving no time to research the title and the condition of the property.
Stage 3 – Real Estate Owned (REO) or Bank-Owned Property
When the lien holder takes ownership of the property either during the pre-foreclosure or at the public auction, it will eventually resell the property to recover the unpaid loan amount. Before it can resell, though, the lender clears the title and repairs all necessary title repairs, which may take some time.
Bidding on an REO is not the same as making an offer on a privately owned property, as the response might take a little longer. Banks must demonstrate to shareholders that they are reviewing multiple offers and trying to get the best and highest offer. It is possible to negotiate with the lender, if not in the price, on a lower interest rate loan for financing the purchase, or a reduction on the closing costs.