The news is pretty hard to miss these days–home foreclosures are at an all time high in the United States and the problem does not look like it is going away soon. Some areas of the country have seen huge increases in the numbers of foreclosed properties recently. Is this to a home buyer’s advantage or should there be a red flag flying?
First off, you will need to be familiar with what forclosures are and what the process entails. Foreclosures are properties that have been acquired by mortgage lenders because the owners have defaulted on the loan payments. The lender or “mortgagee” takes the property that was pledged as collateral for the loan when the payments are behind (that is, when the payments are “in arrears” or “delinquent” and the owners are said to be “in default”). Lenders must follow the state laws where the property is located. Owners default on loan payments for a variety of reasons including divorce, illness, death of a spouse, and loss of employment. Lenders try to work out some kind of resolution with the owners to make up the payments in a process called “loss mitigation.” This period is referred to as “preforeclosure.” If efforts to work out a correction for the problem do not succeed, the lender will generally initiate foreclosure procedures after three months of non-payment.
The reasons for the jump in the number of foreclosures are numerous, including questionable mortgage loans, buyers taking on home payments well beyond their means and adjustable rate mortgages that are resetting at a much higher rate. Lenders have begun to foreclose on these loans to try to limit their losses. The process of foreclosure will vary a bit from state to state.
What is the foreclosure process? (If you want more information on this subject, you can find lots of material at
There are basically three stages to the foreclosure process. At each stage, the real estate is thought of as a distinct type of property that a new purchaser can acquire:
“Preforeclosures” are still owned by the borrowers who are in default on one or more mortgage loan payments. www.foreclosure.com lists thousands of properties that are in this early stage.
“Auction” properties have been posted for public sale and may be bought at the time of the foreclosure auction by arranging to pay the arrears plus other costs at the same time the lender legally takes ownership of the collateral.
“REO” is the term for “real estate owned” by the bank, savings and loan, or other lending entity after the foreclosure sale (or “auction”) is concluded with no other purchaser buying the real estate.
To summarize, a preforeclosure occurs when the lender initiates foreclosure proceedings as the result of a default. If the borrower cannot cure the default by paying the arrears, and does not sell the property, it is sold at a public foreclosure auction. If no one buys the property at the auction, it becomes REO and the lender is now the seller.
There is also a fourth stage for some properties. In the case of loans “insured” by a federal agency such as HUD or Fannie Mae, or “guaranteed” by the Department of Veterans Affairs (VA), the properties are eventually acquired by the government. When such properties are foreclosed by the mortgagees, the agencies reimburse the lenders for the loan amount and certain costs of foreclosure. The government then takes ownership of the real estate and makes arrangements to sell the properties to the public through contractors and Realtors.
You can see how at each stage, the owner is a highly motivated seller. Watching the progression of properties through one type to the next will allow you to understand when is the optimum time for you to seize the opportunity to benefit by helping others to solve the problems that have arisen from the borrowers’ difficult circumstances.
Is there money bo be made? Foreclosures can be an opportunity for a buyer to gain “sweat equity” by improving a property that they purchase at a below market price. They are not, however, the path to easy riches that many infomercial gurus tout. You should be aware that foreclosure properties are sold in “as is” condition. That means that neither the owner, foreclosure attorney, lender, government agency, nor their agents are required to do any property repairs. You should therefore expect and be prepared to fix up the property, either by yourself or by hiring a contractor. Occasionally, REO properties, especially VA homes, may have had some repairs or cosmetic work done to them, and in that case, you are buying that work too, like it or not, so the “as is” principle still applies.