As a real estate investor, foreclosures can provide you with incredible opportunities to purchase and profit from undervalued properties. But what exactly is a foreclosure and how do you invest in one? In this article, I’ll give you an overview of what foreclosure investing is…and why you should be interested, very interested, in getting involved in this hot area of ​​the real estate market.

Let’s set the stage by explaining the typical home purchase in the United States today. Let’s say Tom and Sarah want to buy a house. They have saved a down payment and found their dream home. Your local bank is willing to lend the remainder of the purchase price (say 85%), as long as Tom and Sarah repay the loan in monthly payments of principal (the amount they borrowed) and interest (based on the loan rate of the bank) for a certain period of time, that is, 20, 25 or 30 years, now even 40 years.

So Tom and Sarah make their monthly payments and finally own their home and all is well…

But yes…

…cannot meet their payments?

What if, after keeping your interest rate low for the first year, it “resets” to a higher rate…that’s too high?

What if, based on their financial circumstances, Tom and Sarah cannot afford their monthly payments?

Well, unless they can work out a less tedious deal with the bank…the bank probably won’t be too happy with Tom and Sarah!

And if you’re like many (if not most) banks, you’re likely to start foreclosure proceedings. Basically, these are the legal procedures by which a bank can repossess and then sell the property of a delinquent mortgagor.

Laws differ from state to state, but there are two ways a property is typically sold through foreclosure.

The first is when the property is sold under the supervision of a court. Proceeds from the sale go first to pay off the mortgage and then to satisfy any other lien holders (i.e., anyone else with certain ownership rights to the property), and finally to the mortgagor (i.e. that is, the people who borrowed the loan, in this case). painting Tom and Sarah).

The second type of foreclosure is a “power of sale foreclosure.” In this case, the mortgagee or mortgage holder (ie, the lender) sells the property without court supervision. This approach is legal in most US states, and because it does not require brief supervision, it is much more convenient. As with a court-supervised foreclosure, the proceeds of the sale go first to the mortgagee, then to the lien holders, and finally to the mortgagor.

In either case, there is a public auction and the property is sold to the highest bidder.

Now, while Tom and Sarah, as mortgagors, should theoretically receive a portion of the proceeds from the sale, it’s not often that mortgagors make much of a profit from a foreclosure sale! In fact, the whole process is likely to be quite difficult for them. So this is all pretty bad news for Tom and Sarah…but hopefully they can find a less expensive house where they can afford the payments.

However, for a savvy real estate investor like YOU, foreclosure sales often present fantastic opportunities for profit! Basically, this is because foreclosed properties typically sell for MUCH less than their market value.

One of the main reasons for this is that banks and other lenders are primarily motivated to get rid of these properties and recover whatever money they can for them, as soon as possible. They don’t necessarily want, nor do they have the time or know-how, to extract the maximum sales price for a given property.

This is great news for the foreclosure investor. Even better is that right now, with foreclosure rates higher than they have been for many years, there are more and more opportunities for you to make significant profits from foreclosure sales.