Understanding the Foreclosure Buying Process

Record numbers of homeowners are facing foreclosure. The concept of foreclosure isn't one many people fully understand, although they know there is the potential for getting a bargain on a house purchase. Here is some information to consider.

The foreclosure process typically occurs in three main steps: pre-foreclosure, auction, and bank-ownership or real-estate owned (REO). Each has it's share of distinctions and pros and cons. Here is some information from RealtyTrac, a leading foreclosure listing service.

Pre-foreclosure: A property enters pre-foreclosure after the owner misses a number of mortgage payments (usually three or more) and thus defaults on the loan secured by the property. The filing of pre-foreclosure is called Lis Pendens in legalese. During the pre-foreclosure period, the owner may be able to stop the foreclosure by paying off what is owed (known as curing or reinstating the loan), by selling the property, or by transferring ownership of the property to the bank (known as a deed in lieu of foreclosure). If an individual is interested in purchasing a property in pre-foreclosure, he or she can contact the owner of the home directly or seek out the assistance of a real estate agent if the property has already been listed for sale.

Auction: Loans that are not satisfied in the pre-foreclosure process are found in default and the home will be set up to be sold at a public auction. Each state has different rules and time periods for auctions. But generally a date and time is posted and an individual interested in purchasing the auctioned property bids on the home. Bidders at a foreclosure auction typically aren't given any opportunity to fully inspect a property or even view the inside before placing their bids. And the winning bidder may not be able to take immediate possession of a property if state law allows for a redemption period during which the previous owner may be able to purchase back the property by paying the amount of the winning bid plus any applicable costs. Also, the purchaser may have to come up with a large down payment, or even all of the purchase price in cash at the time of the auction. This process isn't for the faint of heart.

Bank-owned: Properties in this stage of foreclosure have been repossessed by the bank/lender, either through a foreclosure auction or a deed in lieu of foreclosure, in which the owner in default transfers ownership directly to the bank. Bank-owned or REO properties are usually put up for resale with a real estate office, as the bank is interested in a quick sale and getting the most money for the property.

Buying a bank-owned property can be the most straightforward way to get a foreclosed home, because you aren't dealing with an emotional homeowner and you don't have to have a large sum of cash on hand as with an auction.