A Helpful Foreclosure Primer

It is a crude fact of life that one person's misfortune is another's good luck and perhaps nowhere is this more apparent than in real estate. Foreclosed properties would not exist unless their owners were having problems.

If the borrower fails to abide by any of the terms of the mortgage, the lending institution may bring foreclosure action. By law all foreclosed properties have to be advertised and go to auction, so information on them is easy to find. Lenders will try to work out another option for payments by the debtor since they prefer not to foreclose. Failure of the owner to obtain a sale will result in the need for the lender to foreclose. At this point the lender may pursue two courses of action: foreclosure by judicial or non-judicial proceedings.

Judicial Foreclosure

A judicial foreclosure is a court action to cut out the right of redemption the debtor has in the property. The courts give the mortgagor a statutory period within which to redeem the property and a failure to do so results in losing the property.

Once the foreclosure by judicial sale takes place, the court confirms the price to ascertain that it was fair. If the price was extremely low, the court has the power to set the sale aside.

Non-judicial proceedings

In a non-judicial foreclosure, the state permits a foreclosure by power of sale provided the mortgage carries this clause. This allows for a quick recovery of the property for the lender or beneficiary. Any interest the debtor has is terminated, the property is sold, and the lender is reimbursed from the proceeds of the sale,

When a foreclosed property is sold, the lending institution, or note holder, is entitled only to the note or mortgage balance plus accrued interest, attorney's fees, and any out-of-pocket costs such as insurance, property taxes, and possible receivers' fees related to the foreclosed property. Any surplus money raised at an auction goes to the owner or borrower.

Investing in Foreclosures

Though foreclosures sound attractive, they are not necessarily a good investment as they typically require time, money, and effort to make profitable. A prudent buyer should therefore negotiate the purchase price with a substantial enough discount from the market price. It is important to remember that foreclosures are problem properties and purchasing them is assuming those problems. Thus, it is recommended that novice investors do not get involved with foreclosure properties unless the investors have the support of professionals who can provide appropriate guidance and advice.

Disadvantages of buying a Foreclosure property

The main drawbacks of buying foreclosures are:

o Buying foreclosures typically require all cash payment as the lenders rarely want to take back mortgages on foreclosed properties oOften foreclosed properties have been abandoned by the previous owners and may be in poor condition oIf the foreclosed property is an apartment building or complex, there may be substantial vacancies. Thus, there may be nonpaying tenants who have to be dispossessed, which entails legal fees and time.

If you follow late night infomercials, you might be tempted to think that anyone can make a bundle in the foreclosure market. Not so. You can be successful, but it requires a learning process, shrewd assessment, and the ability to walk away when the deal is not right.