Now within this scenario there are many ways that one can purchase this property for a percentage of what today’s value is. The first way is called a Short Sale. Short Sale buying happens before a pre-foreclosure takes place. It begins when the borrower decides that they can no longer make their mortgage payments and informs the bank that they will be defaulting some time in the future but want to sell the property before it gets to that stage so that the bank wont begin a foreclosure action on the property and the homeowner wont have to go through the ordeal of having a foreclosure brought against them. Furthermore, the bank allows the sale of the property for less than is owed on the loan.  So in the above example if the remainder of the loan is $125,000 and the bank approves a short sale the purchaser could end up with a home bought for $100,000 that is worth $300,000.

After the initial foreclosure filing is done, properties can still be bought in pre-foreclosure status. That is when the buyer goes directly to the borrower that is in default and offers to pay him the entire amount of the loan and sometimes a little extra. There is not a lot of time with buying pre-foreclosures since once the legal action is brought against the default mortgager than the time table starts ticking before the foreclosure property auction. Buying a pre-foreclosure will benefit the bank since they won’t have to pay all of the legal fees to continue with the foreclosure, benefit the borrower seller, since they usually won’t have the negative mark of a foreclosure on their credit record, and will benefit the buyer since they will pick up a property at a discount.

If the borrower in default has not paid the delinquent mortgage payments or sold the property either as a short sale or in pre-foreclosure status than a foreclosure is evident and an auction will take place. At the foreclosure auction which can take place at either the town or county courthouse or at the foreclosed properties themselves, bidders arrive early in many cases to inspect the condition of the property. The highest bidder will win the auction and take ownership of the property being foreclosed on. If in the event that the there is nobody that will bid up to the amount owed on the loan than the bank will take ownership of the property. This is called REO or “Real Estate Owned.”

Buying REO properties is another way that investors and home owners can get a huge discount on foreclosure properties. The banks are not in the property management business so they would rather not have the headache of up keeping the property, paying the taxes, insurance utility bills etc. Therefore they usually look to get rid of the REO properties quickly and inexpensively.

What is a foreclosure?

A foreclosure is legal proceeding usually followed by a court order which allows the lender, mortgagee or lien holder to redeem the property from the property owner.  Foreclosures are most commonly used by banks or financial institutions to repossess properties whose owners default on their mortgage obligations.

Steps to foreclose on a home

Pre-foreclosure Period – This is when the lender files with the town records a Notice of Default  (NOD) or Lis Pendens (LIS) usually after 2-6 months of non-payment. After this filing the property owner than has a certain timeframe to correct the default and get brought up to date with their mortgage or face being foreclosed on. If the borrower still does not come clean with their delinquent mortgage payments than a notice of sale is issues and a foreclosure auction is scheduled.

Auctions – Depending on the state and county a foreclosure property sale can take place at the county courthouse or at the foreclosed properties themselves. At the public auction the lien holder will be present as well as other investors or home buyers that are interested in buying the property. The bank is most concerned in recouping the mortgage amount that they laid down on the property and any legal expenses and fees that they have incurred through the foreclosure process. They are not in real estate business so they would much rather get their money back than the foreclosed properties at the auctions. But they still will not lose the value of their mortgage completely so bidders will usually have to come close to what they are owed. At foreclosure auctions the property is sold to the highest bidder, weather it be the bank, investor or home buyer.

Bank Owned, REO – If the bank does not got an expectable bid at the foreclosure auction than they repossess the foreclosed properties. This is known as REO properties or “Real Estate Owned”.

The United States is being faced with one of the worst economic periods of it’s history. Many economists agree that the state of the US economy is the worst that that it has ever been next to the Great Depression of the 1930′s. Many factors led up the current recession but none more potently ignited the current crisis as did the Sub-prime Mortgage crisis that began in 2007.

Sub-prime Mortgages are loans given by banks and other financial institutions to borrowers with riskier credit scores and credit histories than the norm. Because these loans are riskier for the banks the yields or returns on loans to the banks are greater. John Lonski the chief economist for Moody’s investment services said that 21% of all US mortgages where sub-prime in 2006, that number up from 9% eight years earlier in 1994.

Since the banks were giving loans more and more heavily in the sub-prime market leading up to 2006, their risk increased. And soon, when many borrowers became unable to pay their mortgages the bubble began to burst and the domino effect that crashed the housing market, destroyed some of the greatest financial institutions of all time, and sparked the global recession of which we are still feeling the effects today.

Economic Crisis

Once the snowball started rolling, catastrophic occurrences became evident. The default rates and foreclosure filings started piling up in late 2006 into 2007. Sub-Prime Mortgagees could not make their monthly mortgage payments which in turn meant that banks stopped making money. Hundreds of banks worldwide closed their doors in the months and years to follow. When Bear Sterns and Lehman Brothers, two of the largest US financial institutions on record, closed their doors panic was felt throughout the world. The New York Stock Exchange (NYSE) crashed in September 2008. Investors throughout the world started pulling their money out of US banks and selling their US stocks and assets. The dollar shrank in value and many though the end of the world was near.

Foreclosure Domino Effect

Another factor which is credited in aiding the housing market crash and most recent economic downturn is the housing market bubble itself.  Since the early part of the millennium banks started lending more liberally in both the prime and sub-prime markets. With this large influx of cash home buyers and investors took to the market and began

buying real estate properties in mass.  The flood of money and buyers imploded the prices in the housing market to levels that were unaffordable. As soon as the borrowers were unable to pay their mortgage banks began the foreclosure process to regain possession of the asset. Since banks are obviously not in the property management or real estate business so to speak, the more foreclosures that they took back, the worse it became for everybody. Banks were stuck with homes and need to sell them so that they can cut their losses and not be out totally hundreds of thousands of dollars or whatever the previous selling price was. Therefore they needed to drop the prices drastically so that they can move the built up inventory of foreclosed properties of the shelves. Since the foreclosure  inventory piled up, and the list prices were sometimes up to 80% off of the previous sale prices the overall average estimated house values tumbled nation wide. For the average American their home is their biggest investment so when values dropped so did consumer confidence and consumer spending. The retail markets where hit hard and the ripples made their way into the job markets, and unemployment rates skyrocketed nation wide.  No jobs and no money became the second wave of foreclosures that plagued main street America and the cycle had made its way full course.