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What is a foreclosure?

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 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 or Lis Pendens. The foreclosure process can end one of four ways:

1. The borrower/owner reinstates the loan by paying off the default amount during a grace period determined by state law. This grace period is also known as pre-foreclosure.
2. The borrower/owner sells the property to a third party during the pre-foreclosure period. The sale allows the borrower/owner to pay off the loan and 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. The lender can take ownership either through an agreement with the borrower/owner during pre-foreclosure, via a short sale foreclosure or by buying back the property at the public auction. Properties repossessed by the lender are also known as bank-owned or REO properties (Real Estate Owned by the lender).

Timeline for Foreclosure

What is REO ?

Most consumers buy foreclosed properties from the banks that seized them. The term for such houses is REO, for real-estate owned by a bank. Some real-estate agents specialize in selling REO properties. A good share of REO houses are decrepit. Many sit empty for months before they are sold, and they end up in such bad shape that they are ineligible for mortgages. Investors often buy these REOs with cash, fix them up and sell them, just like the house flippers of the boom years. Whether bought from the bank or from a flipper, almost all REOs are listed through real-estate agents.

 Properties with a past…

It’s safe to buy a previously foreclosed-upon house if title insurance is available on it, experts say. However the foreclosed house ends up in a buyer’s hands, issues that lurk in the property’s past could “cloud title” — cast uncertainty on the buyer’s ownership rights. Title insurance protects against such defects in the title, such as undiscovered liens, forged signatures or defects in documentation. Buying title insurance is optional but highly recommended for these types of properties.

Foreclosure, not always a deal?!

Many buyers now begin their home search with a request to look at foreclosures and bank-owned properties. But there’s no guarantee that buying a foreclosure will save money compared with buying the traditional way. Discounts vary tremendously and most bank owned properties are priced right at market value. Some foreclosed homes are priced higher than their true value because sellers are trying to pay off the mortgage and cover taxes and transaction costs.