There are 3 basic stages of foreclosure. Stages are pre-foreclosure, foreclosure, and post foreclosure. Investors can take advantage of all three stages depending on their level of experience or preference. Most real estate investors buy homes that are in pre-foreclosure stage. The foreclosure process begins when a borrower/owner defaults on loan payments (usually mortgage payments) and the lender files a public default notice, called a Notice of Default (NOS) or Lis Pendens. Foreclosure is a process that allows a lender to recover the amount owed on a defaulted loan by selling or taking ownership (repossession) of the property securing the loan. The foreclosure process can end one of four ways:

1. The homeowner reinstates the loan by paying off the default amount and all the additional late fees during a grace period determined by state law. This grace period is also known as pre-foreclosure.
2. The homeowner sells the property to a third party during the pre-foreclosure period (Real estate investor). By selling home before auction, homeowner can avoid having a foreclosure on his or her credit history.
3. A third party buys the property at a public auction at the end of the pre-foreclosure period.
4. The lender takes ownership of the property, usually with the intent to re-sell it on the open market. These properties are also known as bank-owned or REO properties (Real Estate Owned).

Pre-Foreclosure Stage
Buying a property in pre-foreclosure involves approaching the owner/borrower and offering to buy the property before it goes to auction. The owner/borrower can walk away with the equity in the property and avoid foreclosure on his or her credit history. The homebuyer has time to research the title and condition of the property and can realize discounts of 20 - 60 percent below market value.

After you find a property online, it's a good idea to drive by the property to get a better idea of the property's condition and the type of neighborhood. When a property enters pre-foreclosure, the owner usually has few months depending on the state’s laws to reinstate the property by paying off the amount in default. The reinstatement stops the foreclosure process, so it's important to find out if a property has been reinstated before proceeding. The best way to check if the property has been reinstated is to call the trustee or attorney assigned to the foreclosure. The trustee cannot typically answer questions about the property but they can just let you know if the property is still in foreclosure or not. Find out as much as you can about the estimated market value of the property, how much is owed on the property and if the owner has any other liens against the property. This is all public information and you can research on your own with the county recorder or use a title company/title abstractor for a fee. Some states has redemption period which allows the borrower the right to cure the default and reinstate the loan by paying all the loan payments that are in arrears, interest, and legal costs incurred by the lender after the sell of their property in the public auction.

Foreclosure Stage
If the homeowner fails to cure the loan during the pre-foreclosure stage then the property is sold at public auction. It's also not uncommon for auctions to be postponed without notice of any new date being published. Although cancellations and postponements are announced at the time and location of the originally scheduled auction, you can call the trustee to find out beforehand.

Most auctions are at a public place in the same county where the property is located. In many states, all the auctions in each county are at the same location. You can find out auction location by calling the trustee or the local county clerk’s office. If you call the county clerk, make sure you clarify that you are looking for the location of mortgage foreclosure auctions, not tax foreclosure auctions.

The bidding procedure varies from state to state, so you should become familiar with the procedure in your area before bidding at an auction. In some states, bidders are required to bring the full amount they want to bid in the form of cash or cashier's check to the auction. In other states, bidders are required to bring a certain percentage (10 percent is common) of the bid amount to the auction and pay the remainder of the amount within a certain timeframe. We encourage you to educate yourself by simply observing a local auction. If there are outstanding liens (junior liens) on the property, the winning bidder at the auction may be responsible to satisfy these liens in some cases, so it's important to check for any liens and the priority of the liens before you bid at the auction. A real estate attorney or title company can check for liens, or you can check directly with county records.

The priority of a lien is usually determined by the date it was placed on the property. So a first mortgage will usually have the first priority, and all other liens will be considered junior liens. In most states, the public auction clears out any junior liens, but there are exceptions such as tax liens, which typically will continue to be in effect after the auction. The opening bid at the auction is based on the total amount owed to the foreclosing lender and may include fees incurred because of the foreclosure proceedings. If no one bids above that amount, the foreclosing lender will take possession of the property. It's important to know this amount so you can determine if the auction represents a potential bargain purchase when the opening bid is compared to the property's market value.

Post foreclosure Stage- Bank owned (REOs)
Lender takes ownership of the property, either through an agreement with the homeowner during pre-foreclosure stage or at the public auction. Then lender will usually re-sell the property to recover the unpaid loan amount. The lender will typically clear the title and perform needed maintenance and repair; however, the discount for these REO homes is typically less than a pre-foreclosure or auction property discounts. Some default loans are backed by government loan agencies such as the Department of Housing and Urban Development (HUD) or the Department of Veterans Affairs (VA). In that case, the government agency would be responsible for selling the property. The information you need to know is the estimated market value of the property and the bank's break-even amount. The bank's break-even amount includes the unpaid balance of the loan, any fees and costs incurred during the foreclosure process and any other liens the bank had to pay off to take ownership of the property. The unpaid loan balance plus any foreclosure fees and costs are included in the opening bid. At this stage of foreclosure it's more likely the property will be listed for sale on the Multiple Listing Service (MLS), so make sure you or your agent checks the MLS. If the property is not listed for sale in MLS, you can contact the foreclosing bank directly. When you call the foreclosing bank, you should ask for the REO (Real Estate Owned) department, bank-owned homes department or asset management department.

We recommend that you buy several books on foreclosure. Learn about your State’s laws on foreclosure process before pursuing any property deals. This article is designed to provide accurate and authoritative information in regard to the subject matter covered here. It is provided with the understanding that the author is not engaged in rendering legal, accounting, or other professional opinions. If legal advice is required, the services of a competent professional should be sought. Reproduction of any part of this information contained herein, in any form or by any means, without the written permission of the author is unlawful.