Real Estate Foreclosure

Foreclosures involve a complex network of distressed homeowners, bankers, government officials and prospective buyers. The foreclosure process begins at mortgage default. After foreclosure, the stages of foreclosure include pre-foreclosure, foreclosure auction, and real estate owned repossession. The foreclosure process presents unique risk versus reward scenarios, as motivated sellers hope to quickly arrange deals with value-conscious buyers.

Mortgage Default

The mortgage contract allows creditors to foreclose upon, or seize, property as compensation for unpaid loan balances. Municipal officials may also foreclose on real estate, and sell it off to collect unpaid property taxes.

Mortgage payments are generally due on the first of the month—with an ensuing 15-day grace period. The foreclosure process begins as the grace period expires, if the lender has not yet received a full payment. After 90 days, banks address a notice of default to homeowners, which offers provisions for them to catch up on payments and avoid foreclosure. If another 90 days pass without payments, a notice of trustee’s sale is posted prominently on the property. The bank may now coordinate plans to auction off the home to make good on the unpaid mortgage loan.

Stages of Foreclosure

The foreclosure process includes three separate stages. Mortgage loan default triggers pre-foreclosure. In pre-foreclosure, the mortgage loan is in default, but the home has yet to be seized. The pre-foreclosure stage generally lasts for six months, as distressed homeowners look to raise cash or sell the property to pay down the mortgage loan. Existing homeowners may also attempt to negotiate loan modifications, where banks agree to reduce the mortgage principal balance and interest rates. If no sales or payment arrangements can be made, the home will then be auctioned off to the highest bidder.

A real estate auction attracts sophisticated buyers and investors who make cash offers to facilitate quick transactions. After the auction, banks repossess unclaimed homes as real estate owned (REO) holdings. At that point, prospective buyers would then negotiate deals directly with banks.

Financial Risks Versus Rewards

Home foreclosure deals are high-risk and high-reward transactions relative to conventional real estate transactions. Foreclosed homes are often in disarray because homeowners who default on loans obviously lack the funds for proper maintenance. After their eviction, foreclosed properties may sit vacant for several months, before any deal closes. During this time, neighborhood criminals can break into the property, and make off with valuable fixtures, appliances and metal work. Real estate auctions are particularly risky, because their format may not allow time for thorough home inspections. Sellers of foreclosed homes may offer deep discounts to attract buyers in lieu of the aforementioned risks. Buyers can spend the cash savings to restore foreclosures and sell property at later dates for large profits.

Banking officials and the local recorder of deeds office maintain lists of foreclosed addresses and opening bids. With list in hand, a prospective buyer may walk past addresses of interest to get a feel for the home’s condition and surrounding neighborhood. Analyzing comparable real estate valuations can help the prospective buyer place a reasonable bid upon the foreclosed property. Calculate a strong offer by researching comparable sales figures for area real estate. CNN Money claims the foreclosed real estate often sells at a 20 to 40 percent discount to comparable property.