The foreclosure process isn’t as mysterious as it may seem. Due to federal and state laws, lenders must follow a specific process in order to foreclose on a property. Understanding the process will help you find investment opportunities.

First, you’ll need to understand when a lender is allowed to foreclose. The process starts with the mortgage itself. A mortgage creates five covenants:

1. The homeowner promises to pay the principal mortgage debt

2. The homeowner will insure the building against fire or damage to help protect the bank’s interest in the property

3. The building or dwelling cannot be demolished or removed without the consent of the bank

4. The entire principal will become due in the event of default of payment of principal, interest, taxes, or assessments

5. The bank will consent to the appointment of a receiver in the event of foreclosure

The first three items are agreements the homeowner must adhere to. If those covenants are breached, the bank must pursue numbers 4 and 5. (Why the word “must”? Because banks are really “trust officers”: they aren’t loaning their own money, they’re loaning money that belongs to depositors. They don’t have the right to take risks with other people’s money, so they have to follow these covenants.)

The last two covenants give the bank the means to foreclose. One provides for the appointment of a receiver — typically a lawyer — who conducts the sale of the property. The other allows the bank to accelerate payments and ask for the entire balance. If the bank’s lawyers take a homeowner to court they want all of the money, and if it can’t be paid they want a judgment against the homeowner. Simply put: they want out of the deal because the homeowner has not lived up to his or her obligations.

It’s important to note that until a judgment has been obtained the homeowner is not truly under threat of foreclosure. Once the judgment is obtained the homeowner can be put out of the property immediately.

After a judgment has been handed down against the homeowner, a time is set for the public sale of the property at auction. If the homeowner can’t come up with the entire amount of the judgment award before the sale. that’s it: no more delays, no more compromises ? the sale will be held. Often these sales are held at the courthouse, and in many cases are actually held on the courthouse steps.

The court then appoints a receiver — again, typically a lawyer — to conduct the sale of the homeowner’s property. Ordinarily, real property can’t be transferred without both parties in the purchase agreement signing the transfer deed. Since the homeowner is unlikely to voluntarily sign away his or her home, the receiver has the legal authority to sign a valid deed transferring the ownership to a new purchaser.