REO / FORECLOSED HOMES

Interested in buying a foreclosure? You're not alone. Between January 2006 and May 2012, more than 6.5 million U.S. homes were lost to foreclosure, offering additional inventory alongside traditional real estate properties. Due to the distressed nature of the properties, they offer great appeal to a variety of buyers who are:

• Looking for a bargain.
• Looking to create rental properties for revenue.
• Hoping to "flip" houses by fixing them up and selling them for profit.

But, while a foreclosure may benefit one side of the transaction – buyers – it is heartbreak for the borrower/homeowner. Foreclosure is a process in which a bank, a mortgage company or other lien holder seeks to take a property from a owner to satisfy a debt. The bank or lender may actually take ownership of the property or have the property sold to pay off the debt. As a result of the foreclosure, the owner loses whatever rights he or she had in the property.

Before you begin the hunt for foreclosure properties, take a look at the different stages of the foreclosure process where buyers can find potential bargains on properties:

Stage 1: Pre-foreclosure

In this stage, the property owner has been given legal notice that the foreclosure process is about to begin. He has missed mortgage payments and has been issued a Notice of Default (in non-judicial foreclosure) or lis pendens (in judicial foreclosure). The owner may be working to cure the default or may be hoping for a pre-qualified cash buyer to help him avoid the impending foreclosure.

Be aware that buying a property in the pre-foreclosure stage means approaching the borrower/property owner – generally before the property is listed for sale – and offering to buy the property outright. The benefit to the borrower/property owner is that he can walk away with something to show for any equity he has in the property and may be able to avoid damaging his credit history.

Stage 2: Foreclosure auction

If the loan is not reinstated – meaning the property owner did not pay back the loan to avoid foreclosure – the property will likely be sold at a foreclosure auction. Successful bidders often are required to pay in cash and may not have much time to research the title and condition of the property beforehand. Most auctions require cash payment at the time of purchase.

Stage 3: Bank-owned property or real estate owned (REO)

If the lender takes ownership of the property, either through an agreement with the owner during pre-foreclosure or at the public auction, the lender will eventually re-sell the property to recover the unpaid loan amount. The property is then known as "bank-owned property" or "real estate owned (REO)." The lender usually clears the title and performs necessary repairs, but the process can test the patience of a lot of buyers. So, if you're in a hurry to buy, this type of real estate transaction might not be for you.

Rules governing the processes and timelines for foreclosure vary from state to state. Unless you're an expert in real estate law and transactions, it's a good idea to seek the counsel of an attorney and/or real estate agent familiar with foreclosures.