When investing in real estate, there are a variety of loans for which you can apply. The type of loan you receive will be catered to your situation to best suit your needs. One of these loans is known as a foreclosure loan, which is a loan you can get to purchase foreclosure properties.
Foreclosure deals can be extremely profitable, but it’s important to understand that a foreclosure is a process and not a single event. We want to ensure you are well-informed with this process so that, should you decide to fix and flip a foreclosure deal, you’ll know exactly what you’re getting into and what you can get out of this opportunity.
Here’s how the foreclosure process works:
- A borrower who is behind on house payments is given a demand letter, or notice that they are not complying with their loan agreement.
- A redemption period begins, in which the borrower has an opportunity to pay the loan off in a certain amount of time.
- If the redemption period comes to an end and there is no settlement, a notice of sale is posted. It’s usually posted in a newspaper specific to legal publications. This will set the date and time that the sale will take place.
- The property will go to the highest bidder; usually the bank. The bank bids up to the price the borrower needs to get out of the home, which is known as a credit bid, meaning the bank did not need to bring any of their own money to the sale: they already gave that money to the borrower. The credit bid is an amount that credits against the total amount the borrower owes the bank. In most cases, the bank will bid what is owed, which is typically more than the property is really worth.
- If there is no other contending bidder, the bank will own the property at the end of the sale. They will then get any other individual involved with the property out of the deal.
- Here’s where you, as the real estate investor, come into play: Banks want to unload these foreclosed properties to get them off their books. The money they have tied up in these properties is money they can’t lend to other borrowers, and banks make the bulk of their profits on lending. Since banks are eager to get these properties off their hands, you have the opportunity to purchase the foreclosed property for a steal of a deal.