Understanding Foreclosures

With today’s unsettling real estate market, it’s important to understand what foreclosures are and their different types. Most real estate investors find foreclosures to be a great opportunity to buy into the real estate market.

Foreclosures are defined as a legal proceeding whereby the lien holder (usually the bank that owns the mortgage) files legal action to secure a right of redemption. In layman terms, the bank seeks to remove the borrower from the property. This is done because the borrower has fallen months behind on making mortgage payments and the bank seeks to recoup its loss.

Once the process is completed, the bank is able to once again sell the property and is allowed to keep the proceeds to pay for any legal costs and for money owed on the original loan.

Because banks rarely get the actual amount remaining on the original mortgage, it is an excellent opportunity for investors because they are able to purchase a property for much less than what a regular property would sell for.

Here are some of the different types of foreclosures:

·         Foreclosure by judicial sale: The sale of the property is done through the supervision of a court. All proceeds go to satisfying the mortgage first and then to other lien holders and finally to the borrower if any proceeds are still remaining.

·         Foreclosure by power of sale: This occurs only if a power of sale clause is included in the mortgage. This process involves the sale of the property by the mortgage holder without court supervision.

·         Strict Foreclosure: This is a rare type of foreclosure but occurs is allowed in a few states including Connecticut, New Hampshire and Vermont. In a strict foreclosure, the court orders the defaulted mortgagor to pay the mortgage within a specified period of time. If the mortgagor fails to pay, the mortgage holder gains the title of the property with no obligation to sell it.

Understanding foreclosures and how they operate can help investors become stronger investors in the real estate market.

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