Foreclosure is a process that allows a lender to recover the amount owed on a defaulted loan by selling or taking ownership (reposession) 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:
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.
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.
A third party buys the property at a public auction at the end of the pre-foreclosure period.
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 reposessed by the lender are also known as bank-owned or REO properties (Real Estate Owned by the lender).
The advantage of buying a foreclosure is fairly obvious - the opportunity to obtain a property for a lesser sale price. Foreclosed properties are often neglected or even damaged intentionally by the owners when the owners cannot recover the loan value by selling on the open market. This disadvantaged state presents a potentially substantial value to open-minded or budget conscious buyers. Furthermore, banks are not in the business of holding onto real estate. Their goal is to liquidate. Being on the buying end of this scenario can be financially favorable.
There are, however, pitfalls and nuances of buying foreclosures that require considerable experience to navigate successfully. A Realtor who is a foreclosure specialist is an absolutely key ingredient to a successful foreclosure purchase. He or she will be able to advise you on the amount of time the process will take, as it does take longer than a normal buying transaction. The Realtor will also be able to tell you what inspections are or are not allowed and when they must be obtained. He or she will also help you mitigate unnecessary expenses, give you important selection considerations, and ensure you are prepared at each step that is unique to a foreclosure transaction.
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