Foreclosures: What are they?

House on stack of cash
Ok, easy answer: A property that is now owned by the bank due to loan default. Is that all? Yes, pretty much. A borrower can’t pay their mortgage so the bank forecloses on the property, and now the bank owns the property! The bank will usually try to sell the property at an auction, but sometimes they bundle a few properties together for potential investors, selling the property(s) traditionally through an REO (Real Estate Owned) agent that specializes in foreclosures if an auction doesn’t bode any takers.

Banks and mortgage lenders want to avoid foreclosing on properties. In fact, they will work with borrowers pretty extensively to cure the default on the loan, including but not limited to temporarily adjusting payments to make them more affordable, which is also referred to as a special forbearance or a mortgage modification. Banks and lenders will normally start foreclosure proceedings about three to six months after the borrowers’ first missed payment. The average foreclosure process lasts anywhere from 450-700 days.

Selling properties through an REO has some advantages. The bank can usually sell the property for more money, as one of the requirements is the eviction of occupants (if necessary), which means the house can be shown/inspected/appraised. The title is required to be cleared before a property can be sold via an REO, too. Auctions don’t allow for walk-throughs, inspections or anything like that. Auctioned properties are sold As-Is, which means they sell for less. And clearing a title, like you’ll have to do if you buy a property at auction, can prove costly if there are any liens. You likely wouldn’t find that information out until after you’ve made the purchase. Like I said before, REO’s have the ability to remove tenants before selling the property, and auctions don’t require the properties to be vacant, so if you buy a property at auction, it is also now your responsibility to have the previous owner(s) legally removed, which can be uncomfortable for some people, me included!

Buying foreclosures does come with some risks, but if you’ve got the means (money) and motivation, it may be right up your alley. Happy Hunting!