Foreclosure is a process in which a piece of real estate becomes the property of a lending institution due to the legal owner’s inability to make scheduled payments on the mortgage or deed of trust.

Typically, the lender files a notice of default after a homeowner fails to make his or her mortgage payments for several months. If the loan is not reinstated, the lender moves to foreclose. As a result, the lender becomes the new legal owner of the property and has the right to resell the property and recover any outstanding loan balances in addition to foreclosure expenses.

The foreclosure process consists of three stages: pre-foreclosure, which begins the redemption period; foreclosure, which is when the home is sold at a public auction; and post-foreclosure, which is when the property reverts back to the lender if it fails to sell at the public auction. Although each stage offers bargain-buying opportunities, the pre-foreclosure stage is considered by many real estate investors to be the most promising time to purchase during the foreclosure process.

Investing in pre-foreclosures means you will be acquiring property any time before the scheduled public auction. As the investor, you will be buying the property directly from the owner. The earlier you contact a homeowner in pre-foreclosure, the more time you will have to make a connection, structure a deal and purchase the property.

There is a common misconception that real estate investors purchasing homes from owners facing foreclosure are taking advantage of the homeowner’s misfortune. This is simply not true. A Notice of Default is filed only when a borrower (property owner) has broken the terms agreed upon with lender at the inception of the loan in default. This breech gives the lender every right to protect its financial interests. Therefore, an experienced real estate investor becomes the problem solver by finding a win-win solution that will help the homeowner get out of default.

Property owners facing foreclosure are typically scared or in denial. Many of them hope some miracle will happen that will make their ordeal simply go away. Doing nothing will certainly ensure a homeowner’s foreclosure, loss of home, loss of equity and credit rating damage for an entire decade.

When dealing with an owner in pre-foreclosure, talk to them as soon as possible. It is vital to explain the following three benefits of avoiding foreclosure:

1. Protects their credit

By working with an investor, homeowners may be able to avoid foreclosure and begin rebuilding credit. Even if a homeowner endures the process of losing his or her home, the repercussions of a foreclosure on a credit report are far reaching. A poor credit rating affects everything from buying a car to renting a home. With certain businesses, credit is even a factor in employment. Investors often help homeowners protect credit.

2. Make a profit

While it is true that real estate investors purchase at a discount, a homeowner facing default may still be able to recover some of their equity and walk away with profit.

3. Get a fresh start

Stopping the foreclosure allows homeowners to breathe a sigh of relief. As the pain and pressure of the foreclosure lifts, they find it easier to move on and begin rebuilding their life.

Buying in the pre-foreclosure stage can be the most lucrative slice of a real estate investor’s business. Once rapport and trust have been established, a professional real estate investor can determine whether the sale of a property would truly benefit everybody involved.

There are various ways to profit while helping people find viable solutions for their defaults. The following three are most common:

1. Purchase at a discount

Real estate investors are not likely to make a profit by purchasing at full market value. As an investor, it is essential to inform potential sellers that you earn your living from your profits. Therefore, you must buy for less than retail price while taking into account acquisition, sales and holding costs and any necessary repairs. A discount of twenty to thirty percent of full market value is common practice among real estate investors.

2. Buy property “subject to” the existing loan

There are widely spread rumors that it is illegal to purchase property that involves taking over an existing mortgage. This is completely false. While assumable loans are practically extinct, it is perfectly legal to purchase property subject to an existing loan. It is important to be aware of the “due on sale” clause stating the existing lender can call the loan due upon the transfer of title. In other words, the lender has the right to demand full payment of the outstanding loan balance at the time of transfer. In practice, lenders would rather receive their monthly payments than call the loan. Purchasing property subject to the existing financing means a smaller out-of-pocket investment for the real estate investor.

3. Create instant equity utilizing a Short Sale

Structuring a Short Sale can prove profitable when dealing with a homeowner facing foreclosure whose property is equity deficient. In this market, troubled lenders would rather discount their mortgages than increase their already mounting inventory of foreclosed properties. The type of discount you create will largely depend on the quality of your Short Sale package combined with the quality of your negotiating skills.

Real estate investors prevent a large number of foreclosures every year across the country. There are many ways for investors to make a profit while helping people move on with their lives.

Undoubtedly, the money is there to be made. Pre-foreclosures are a fabulous way to make it.

Foreclosure Process – Information for Investing in Pre-Foreclosures

Every state and county has slightly different rules concerning the sale of pre-foreclosures and short sale investing, but there is a basic process that each follows. This foreclosure process takes quite a long time before a property is sold at the sheriff’s auction and even, in some cases, before the homeowners are evicted from the property. Yet, even so it’s still a good chance for real estate investors to pick up properties at a discount along every step of the way.

It Begins with Non-Payment

A lender is often a bank that lends the buyer money based on their job, down payment and credit history to purchase a home. In return the buyer agrees to a home mortgage with that bank to begin paying back the loan. The bank makes money because the loan accrues interest over the lifetime of the mortgage. The buyer becomes a homeowner and everyone is happy. Should the buyer turned homeowner stop paying back the loan through the mortgage, the bank has a safety net in being able to take ownership of the homeowner’s property.

This is called a foreclosure. The foreclosure is initiated by the bank when the homeowner has stopped making payments on the home mortgage. The bank may wait an extended period of time before beginning the foreclosure, allowing anywhere from 3 to 6 months for the homeowner to being making payments on the mortgage again. The bank would prefer not to take a property back in foreclosure. It’s a messy, lengthy process and the loss mitigation officers must consider property the bank owns to be a non-performing asset.

Property Enters Pre-foreclosure

A foreclosure is begun when the bank files a Notice of Default through a trustee with the County Recorder’s Office. This notice lets the county and the homeowners know that the bank is getting ready to foreclosure on their property. In short sale investing the home is now considered to be in pre-foreclosure. The pre-foreclosure period is also known at the reinstatement period in that it allows the homeowner some time to catch up their past due amount on the mortgage and keep their property. This amount of time usually lasts about 3 months.

During pre-foreclosure the trustee appointed by the bank, usually a local attorney, prepares for a foreclosure. The trustee makes every reasonable effort to contact the homeowners and let them know about the upcoming foreclosure. This can be done by posting the Notice of Default on their property, sending it in the mail and also placing it in the classifieds of the local newspapers. The trustee may also call the homeowner to see if they can work out payment arrangements to get the mortgage back on track.

If the mortgage loan isn’t brought up to date in this 3 month period the trustee files a Notice of Sale with the County Recorder’s Office. This Notice of Sale is also posted at the homeowner’s property and placed in the local newspaper classifieds.

Goes to Court

Some states require that the Bank go to court and sue the homeowner for their property as part of the foreclosure process. This process can further lengthen the pre-foreclosure period which is a good thing in short sale investing. The short sale process can be a little lengthy itself, so the more time you have to put together a deal, the better.

The bank’s trustee will have to notify the homeowners of the upcoming court date and ask that they show up. However, many homeowners fail to show up in court to fight for their property. This can be because they are ashamed or afraid. Some don’t know the laws very well and could even be concerned that they’ll be arrested for a bad debt.

If the homeowner presents a good case in court or even if the homeowners just show up and provide their foreclosure information, there is a good chance that the court will provide the homeowners with a few more months to try and catch up their mortgage or make arrangements.

The court may also decide to award the property to the bank, especially if this property has gone to court previously or the homeowner doesn’t even show up to state their case.

Foreclosed Property Up for Sale

After the bank forecloses on the property it goes to the Sheriff’s Auction, also known as a Foreclosure Sale or Trustee Sale. This auction can be anywhere from a few weeks to several months from the time the bank has foreclosed on the property.

There are several different popular methods for holding a Sheriff’s Auction, but the most popular is held right on the courthouse steps. The county clerk auctions of the foreclosures one after the other by property number to the public. The highest bidder wins that property. The opening bid on each property is often equal to the remaining loan balance that the bank is owed, plus interest accrued and any additional fees associated with the Sheriff’s Auction.

At this point, short sale investing is bunk. If you still want that property you’ll need to wear the hat of a foreclosure investor and get right in there with the bidding.

After the Sheriff’s Sale

If no one bids on the foreclosed property it is purchased by the bank’s trustee and becomes a bank owned property. It is called, ‘Real Estate Owned’ or REO at this point and usually sits on the banks portfolio until the bank can get it sold to a post-foreclosure investor.

If an investor bids on the property and wins it they are winning the Trustee’s Deed to the property. They become the owner and can do with the property as they wish.

Sometimes the homeowners may still be living in the property after it is sold at auction. In this case the new owner may wish to work out a rental agreement with the homeowners, or ask the homeowners to leave. If the homeowners refuse then the new owner must evict them.

The owner can file an eviction notice with the country sheriff and usually within a few weeks the sheriff comes out to forcibly evict the former homeowners. However, this happens several months to a year after the bank sent the home into pre-foreclosure. Most homeowners have plenty of time to make other arrangements and have either left or are in the process of leaving when the property is sold at auction.

The foreclosure process is a lengthy one, but it provides lots of time for short sale investing to take place before that sheriff’s auction.

If you’re in real estate, or looking to get into it, investing in foreclosures can be very profitable, especially if you get that property while it’s still in pre-foreclosure. There are great benefits to investing in these pre-foreclosures through methods such as bank short sales and later on going to sheriff’s sales to pick up the foreclosure properties. In a way you are benefiting from the homeowner’s loss. Many an unscrupulous person involved in real estate investing has even taken advantage of the homeowner’s predicament, giving foreclosure investing a bad reputation.

However, most investors involved in bank short sales benefit in the way that the Goodwill stores benefit from donations. The investor buys the property that the homeowner wants to get out from under. The same property that banks just don’t want to hold onto and resell it to interested buyers, with a bit of a profit built in so the investor can continue working and saving for their own future. There are benefits for all parties involved in these properly arranged pre-foreclosures deals

Benefits for the Homeowners

If the owner does nothing, a foreclosure is certain, meaning that he or she is certain to lose the property and any equity that is built up in the property. In addition, he or she will also incur a myriad of other problems, including a severely compromised credit report that will take years to repair.

Therefore, when you talk to the homeowner about getting involved with bank short sales before foreclosure, you can explain that this will have the following benefits:

Protect their credit profile.

If they work with an investor, it might be possible to stop the foreclosure. This also means that they can start rebuilding their credit profile or at least stop it from deteriorating further. This is especially important because your credit rating affects everything from credit card rates, to property insurance rates, to buying a car or even finding employment.

They’ll protect the equity they’ve built up in the home.

If a home is ultimately foreclosed upon, the homeowner will lose any equity they’ve built up in it. The investor may be able to recover some of the equity that the homeowner has accrued in the property and even prevent the foreclosure.

They can rebuild their life.
Being under threat of foreclosure is one of the most significant strains one can face. It can affect everything from mental state to job performance, as well as decision-making. If the foreclosure is stopped, the homeowner can at least breathe a sigh of relief and begin rebuilding their financial and home life.

Benefits for the Investor

You can significantly profit from bank short sales. It’s also a great emotional boost to know that you can help someone move on with his or her life, stop foreclosure and the resulting financial difficulty.

Make a Large Return in Profits

Of course, as an investor, there has to be a profit involved or you will not benefit from this process yourself. You can purchase the property from the seller at a discount. Short sales tips always involve negotiating a good deal, but that’s not hard when the bank is willing to sell the property at below market value because they’ll see that is to their advantage to cut their losses. When you rent or resale that property you can sell it for current market value and make a great return from investing in foreclosures.

Find Property in a Niche Market

You’ll have an easier time with your real estate investing if you start out with foreclosure properties. These properties are often less desirable than properties being marketed by real estate agents and they are cheaper. Plus, if you get into pre-foreclosures you’ll have less competition for picking up cheap property. You’ll be catching those properties before they get to the sheriff’s sale.

Super Motivated Sellers

It’s heart-breaking to see, but most homeowners with defaulted properties are very motivated sellers. By the time their bank files for foreclosure, the homeowner usually just wants to walk away from the property without fear of what will happen to their credit. Plus, you’ll be able to negotiate a great price on bank short sales because the bank just doesn’t want to own a property. They want to liquidate their assets and get out while they can too.

Benefits for the Banks

Believe it or not, the banks also benefit from short sale investing. They don’t want to hold onto that property. Any defaulted property is considered a non-performing asset on the bank’s books and affects their lending ratio. So just getting the property sold is a benefit for the bank.

Something is finally done about the mortgage

When the bank has a property mortgage in default they are required to reserve enough cash to cover that loan should the foreclosure go through and they aren’t able to recover their loan. Some banks may even keep as much as 8 times the loan in reserve. They can’t use that money as long as the mortgage is in default.

Frees up their reserve money

As mentioned above the banks must reserve enough money to cover the loan. If they can’t use that money that’s less money they have to invest for their own profits.

Saves time and fees associated with the foreclosure

By taking over the effort involved in putting together a short sale deal you’ll end up saving the bank a lot of effort in completing the foreclosure and managing the property if it doesn’t sell at the sheriff’s auction.

In the end investing in foreclosures provides benefits for everyone, all around the table. The homeowner gets a load off their shoulders, you’ll pick up a discounted property and the bank gets to improve their lending ratios. This is all because you decided to step in and help out with short sale investing.

Pick up more information about real estate shortsaling at Real Estate Investor.com. This is the place to go for the latest real estate news and advice. You’ll find a network of other real estate investors ready to help you out, along with free articles, blogs, contracts and documents for your use.