Most Realtors in today's market at one time or another will get requests for foreclosure properties.  The vast majority of people who ask about foreclosures have little to no experience about the nuts and bolts of the foreclosure process and assume that foreclosure property is the equivalent to stealing property or at least getting it dirt cheap with little to no cash out of pocket.

This blog is meant to be a quick primer on foreclosures.  In California, the timeline on getting a house foreclosed in goes like this:  1). Owner misses payment.  2). Company servicing loan send out Notice of Default (NOD) letter to owner. 3). NOD letter starts 90 day clock ticking.  4). If owner does not pay back payments within the 90 days then. 5).  Lender or servicing company sends another letter, a Notice of Trustees Sale to owner starting another 21 day clock and. 6). After 21 days if owner has not paid back what is owed then lender takes back or forecloses on property.  So there is a 90 day clock plus a 21 day clock in the foreclosure process in California.  That timeline can get delayed if the owner files Bankruptcy or is trying to work out a repayment with the lender.

So, how does one purchase foreclosed properties?  There are typically 3 ways to do this.  The riskiest way by far is at the end of the 21 days at the Trustee's Sale, which is typically held on the courthouse steps in public or at the offices of the title company, and another way is through the typical channels of a local realtor and the third is directly from the bank.

Buying a property at a Trustee Sale is not for inexperienced buyers and requires a great deal of homework and knowledge of the market in the area as well as cash on the barrelhead.  First of all, let's say the foreclosed property has a market value of $250,000 and there was a loan balance of $300,000, the negative equity is <$50,000> and no one will bid on the property at the Trustee's Sale since more is owed on the house than its worth.  If no bids are received, the property reverts back to the lender who eats the $50,000.  The lender will typically list the property with a local Realtor.   Most foreclosed properties are subsequently purchased this way because once the lender takes the property back then sometimes they clean it up, title is clear, and the house becomes easier to market and sell and conventional financing is available at this point.

Here is the other scenario.  Trustee Sale, loan balance of $250,000 and house worth $300,000, so there is positive (+) equity of  $50,000.  Saavy investor's look for properties like this to bid on at Trustee's Sales, although most properties that are foreclosed on have negative equity. 

At the Trustee Sale (which is held the same as an auction) the bank representative will announce whether anyone is there to bid on the property.  Since it is an auction format, one or more bidders could bid, raising the price and lowering your return quickly since in this example the starting bid was $250,000.  Let's assume there is only one bidder.  Congratulations.

Here is where buying a property at a Trustee's Sale requires a great deal of experience, knowledge, and cash.  Using the above example, the winning bidder must procure a cashier's check on the spot for $250,000, since properties bought at a TS can't be financed (unlike properties purchased after they are listed).   So you must pay with cash.  Unless the property had been on the market, you are buying the property sight unseen.  What if the foreclosed parties are still in the house?  Now getting them out is the buyer's problem.  You can see buying property this way at a Trustee Sale auction is not for the faint of heart or inexperienced or undercapitalized.   

There are many books and websites on this subject.  In most areas there are Realtors who work REO's (real estate owned) bank properties.  There are buyers who track REO's and then try and contact the lender directly before it goes to a Broker for sale.  Unless the foreclosing lender is a small local bank, it's hard for the public to get to the decision maker, and easier to wait for the properties to get listed or sale.  I could write a lot more on this but this is a basic primer on different ways to buy REO's.

Lastly, if you are a buyer in this or any market, getting pre-approved is more important than ever.  Don't even consider making an offer on a bank owned (or any property) unless you have done your homework, because there are a lot of buyers looking for "deals" and the ones who get the deals are the ones who are prepared and ready and qualified.