About a decade ago, foreclosures were common in the world of real estate. Now, foreclosures are much less common, but as a real estate investor, you should be informed about foreclosures and how they work.
A foreclosure occurs when the borrower fails to make regular payments on their mortgage. When a mortgage is constructed, the bank places a lien on the property. This means the loan is secured, and in the event that the loan is unpaid, the bank has the rights to the property.
The process can vary depending by state law, but typically the foreclosure process consists of five steps.
- Missed payment. When the borrower stops making their regular monthly payment, the bank takes action and begins the foreclosure process.
- Public notice. The lender makes an announcement in local newspaper. This notice indicates that the borrower defaulted on the loan.
- Pre-foreclosure. This is a grace period that allows the borrower to work out an arrangement. Typically the bank would rather collect some of the payment than none. (Pssst...this is a great way for investors to find discounted properties).
- Auction. The property goes up for sale in a public auction, typically conducted on the courthouse steps. Often, the property is sold at a discounted rate so the lender can recover a portion of their loss, or break even.
- Post-foreclosure. If a third-party does not purchase the home in an auction, it is then in the possession of the bank.