What is a Foreclosure?

Foreclosure is a legal process where the borrower’s house is put on sale by the lender in order to recover the loan balance. The sale of the property is either used to cover the entire balance or as the collateral for the loan. This way the borrower’s equitable right of redemption is formally terminated by the lender. Foreclosure process can also take place when the owner of the property fails to comply with the agreement noted during the loan procurement. The lender – bank, financial institution or a lien holder – repossesses the real estate after this default. If the sale proceeds does not bring the required amount to pay off the loan, the lender can file for deficiency judgement that includes items like principal amount, attorney fees, and accrued interest.

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Foreclosure Strategies

Foreclosure can occur in any market condition where the borrower is simply unable to pay the rest of the loan balance. In a down market, a sophisticated buyer can make a great deal of profit buying such properties (if he or she has is confident that the market will come back at some point in the future). Buying a foreclosure is more than just financing and signing the loan papers. It requires a comprehensive strategy in terms of investment and resale. There are many reasons why an investor buys foreclosure real estate. The reason could be simply to fix up and live in, rent out, or resell. Depending on the market condition, the buyer can decide on the combination of these strategies that works well. For instance, many investors opt to rent out the property they bought when the market is down and the cash flow is positive after repairs and renovations. A rising market is usually not a favorable condition for renting, hence investors choose to fix it up and resell after certain period of time.

Types of Foreclosure

There are many types of foreclosure sales in a typical real estate market. Foreclosure by judicial sale takes place under the supervision of a court, where any proceeds from the sale is used to cover the principal, lien holders, and other fees in that order. The lender begins the process by filing a lawsuit against the loan borrower, and notifies the rest of the parties. The court hears the pleadings from all the people involved in the process and makes the decision appropriately. Foreclosure by nonjudicial sale, on the other hand, does not require the supervision of the court, and any sale that has the deed of trust clause in the mortgage is eligible for it. This process if faster and cost-effective compared to the judicial sale.

Investing in Foreclosure Properties

There are many ways an investor of a foreclosure property can turn a property into. The investor can simply fix a run down property and cover the cost of purchase and repairs by selling the property at a later date. Most properties that are bought in a foreclosure sale through a lender tend to be in much better condition than those bought directly from the homeowner. It is the responsibility of the investor to see if the purchase is reasonable, that the repairs and defects do not exceed the potential resale value.