You see bits and pieces foreclosure deals all around. The buzz is that they’re very profitable. But what is really happening? How do foreclosure deals work?

It all begins when a borrower misses a couple of payments. At some point the bank decides to foreclose and files the needed legal documents with the county. The clock is then ticking. The timing varies by state – a number of states have months and some states have weeks – between the official processing and the real foreclosure auction. It is at some point in this period that investors may also help the non-payment homeowner by purchasing the property. The goal of the investor is to purchase the house for the loan total and allow the home owners walk away without a foreclosure on their credit record and perhaps some cash, depending on the equity in the house. This is exactly good for all – the owners’ credit remains to be decent, they get a few money to start again, the bank gets paid and the investor receives a house with built-in equity.

At times, however, the home is assessed lower than the loan amount. Then the investor, with the permission of the home owner, works with the bank to take less money than is billed for the property. This is named a short sale. Why would a bank do that? When they progress through the months and months of the foreclosure process, the bank has funds controlled that they can’t use. That costs them money. Plus, once the entire foreclosure procedure is over and done with, they still have to sell the house to get back their money. While few foreclosed houses are prepared for showings, they might need to pay for such things as paint, carpet, lawn mowing and realtors. Most finance institutions would like for their money now (even if it is less) than wait.

The next opportunity to acquire foreclosure property is at the county foreclosure sale. At this point the investor does not need to have speak to with the defaulted owner. As the foreclosing lender enters the opening bid, anyone is welcome to surpass that bid. But they have to have cash to cover their bid. Obviously, if the cost is low enough this is another way to profit.

The final way to make it with foreclosures is once to purchase an REO (Real Estate Owned). REO are properties who have finished the foreclosure procedure and the bank or lender holds title. Most chief lenders post these properties with a real estate agent and attempt to sell for market value. Nevertheless, the banks’ chief goal is to lose the property, never to look forward to a full price offer. So, often these properties are bought for lower than market value.

If done correctly, foreclosures could be very beneficial. But simply because a property is somewhere in the foreclosure process, don’t automatically expect that it’s an incredible deal. You will find negative aspects – money might be lost on a foreclosure deal. It requires education and exploration to mitigate the potential for losses and switch tricky conditions into high profit deals.

Another great article by Priddis Greens Homes