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What are real estate foreclosures?

 
These are properties that have been acquired by mortgage lenders because the owners have defaulted on the loan payments. The lender or "mortgagee" takes the property that was pledged as collateral for the loan when the payments are behind (that is, when the payments are "in arrears" or "delinquent" and the owners are said to be "in default"). Lenders must follow the state laws where the property is located. Owners default on loan payments for a variety of reasons including divorce, illness, death of a spouse, and loss of employment. Lenders try to work out some kind of resolution with the owners to make up the payments in a process called "loss mitigation." This period is referred to as "preforeclosure." If efforts to work out a correction for the problem do not succeed, the lender will generally initiate foreclosure procedures after three months of non-payment.
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Another party may offer to solve the problem by buying the property from the owner during preforeclosure, or from the lender at time of the public foreclosure sale, or afterwards. This presents an opportunity for savvy investors and prospective home owners looking for bargains. Foreclosure properties represent an exciting way to buy real estate because they can be purchased at discount prices, typically between 10% to 50% (or more) below market value. These discount prices are possible because the sellers, which can be the borrowers, the mortgage lender, or one of several government agencies, are motivated to sell as quickly as possible to avoid further losses. As an owner-occupant buyer, you can purchase a foreclosure as your home and enjoy instant equity. As an investor, you can buy foreclosures for rental or resale with built-in profit margins.

The foreclosure process can end one of four ways:

1. The borrower/property owner reinstates the loan by paying off the default amount to during a grace period determined by law. This grace period is also known as pre-foreclosure.
2. The borrower/property owner sells the property during the prior to the foreclosure period. The sale allows the borrower/property owner to pay off the loan and avoid risking his or her credit history.
3. A third party buys the property at a public auction prior to foreclosure or during the foreclosure period.
4. The lender takes ownership of the property, usually with the intent to re-sell it on the open market. The lender can take ownership either through an agreement with the borrower/property owner during pre-foreclosure or by buying back the property at the public auction. These are also known as bank-owned or REO properties (Real Estate Owned by the lender).

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This series of articles is brought to you by A. Mark Argentino and other real estate related resources, including Canadian Real Estate Association CREA and the Ontario Real Estate Association OREA.

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