This short tutorial will introduce you to the main types of distressed property purchase opportunities that you can locate using our service.

Those properties include cheap homes of all kinds including bank owned homes, repo homes, HUD homes and other government owned homes as well as for-sale-by-owner (FSBO) homes.

Most people are familiar with the term foreclosure, but few fully understand how the process works. Whether you’re a first-time homebuyer or a real estate investor, this knowledge can be very valuable. While individual states specify different foreclosure procedures, the basic process is the same for all.

Foreclosure is the legal procedure that a lender initiates to reclaim ownership of property after the borrower fails to make payments as agreed. The procedure terminates the rights that the borrower was granted through his mortgage or deed of trust. This gives the lender the legal right to remove the property’s title from the borrower so the property can be sold. The lender recaptures its loan proceeds.

Judicial and Non-Judicial
Depending on the state in which the loan is defaulted, the process is either a judicial foreclosure or a non-judicial foreclosure. The key difference is the length of time it takes a lender to foreclose. In a judicial procedure, it generally takes the lender 12 - 18 months to foreclose, compared to just 4 - 12 weeks in a non-judicial procedure.

States with judicial procedures issue legal instruments called mortgages while states with non-judicial procedures issue deeds of trust. The mortgage foreclosure process takes longer since a lender must initiate a judicial procedure through the courts to obtain a judgment allowing the foreclosure and sale.

By contrast, a default on a trust deed does not require lengthy court action because the title stays with the lender until the loan is fully paid. Plus, the lender has the power of sale which allows the trustee to sell the property more quickly.

Here are the procedural differences in mortgage and trust deed foreclosures:

Trust Deed Foreclosure:
There are three principal parties involved in a trust deed foreclosure. They are (1) The lender (2) The borrower and (3) The trustee (a person legally empowered to hold or control a piece of property for another person). When the borrower fails to make the required payments on the loan, the trustee records a Notice of Default, sends a copy to the borrower, and after a specified holding period, a Notice of Trustee Sale is posted on the property.

The Notice of Trustee Sale is advertised to the public for a required period and if the borrower does not bring the loan current, the property is auctioned to the public.

Mortgage Foreclosure:
A mortgage is a legal contract in which the borrower uses the property as collateral. If the borrower fails to make payments, the lender can take legal action to collect. The lender typically sends multiple notices to the borrower requesting information about the missed payments in an attempt to work with the borrower to bring the loan current. If these efforts fail, the lender uses an attorney to initiate foreclosure.

The attorney files several legal documents including a lis pendens which is a public notice indicating legal action is pending on the property. If the borrower fails to respond, the attorney submits a report to the court with the facts of the case. The judge can then issue a Judgment of Foreclosure and Sale in favor of the lender. At this stage, an auction sale is advertised in accordance with local statutes.

Opportunities to Buy Foreclosure Properties:
You can buy a foreclosure property at one of three stages:

1. Before the Auction (for Preforeclosures or Notice of Default properties). At this stage the owner has defaulted on his loan and in many cases would like to find an alternative that avoids foreclosure and its damage to his credit history.
2. At the Auction (for Auction or Notice of Trustee Sale properties) In this situation the owner has defaulted on his loan and been unable to bring the loan current. The owner is out of time and the property will be sold at a public auction to the highest bidder.
3. After the Auction (for REO, Bank Owned or Government Owned properties) If an auction’s minimum bid is not met, the property’s ownership rights are transferred to the lending institution that supplied the loan. Usually, banks are eager to sell these properties so they can get their money back and issue a new loan.

In pre-foreclosure, a homeowner has missed at least one mortgage payment and is sent a notification that he is considered delinquent on his loan. This is referred to as a Notice of Default, also called an NOD or Lis Pendens. These are essentially the same thing, the difference being that they signify whether the loan is secured through a mortgage or deed of trust. When the trustee files a Notice of Default it becomes part of the public record.

Understanding Distressed Homeowners:
To help a homeowner in distress, you must understand his psychology. In most cases, the owner is dealing with a negative event that has caused him to fall behind in his payments. This can be the result of divorce, illness, job loss or other obligation that has become unmanageable. Often this is compounded by an owner succumbing denial or procrastination, which makes the situation worse. Only once you understand these problems, you can be prepared to help. Remember, as a prospective purchaser, you may very well be the last recourse for a homeowner who is facing foreclosure.

Preventing further credit damage:
It’s unlikely that a distressed homeowner has great credit, but adding foreclosure to his history will have long-term consequences. It will make buying another home or establishing other types of credit very difficult.

Saving some equity:
If you can pay the owner an amount above the mortgage balance, it may well be more than they would receive through an auction. The reason for this that often the owner’s equity is offset by the expenses and fees incurred leading in an auction.

Deficiency Judgment:
This is a court judgment making an individual liable for paying off an amount due because the full amount was not obtained by foreclosure. If the proceeds from the foreclosure sale are insufficient to pay the lender in full, the borrower is liable for the deficiency. Depending on the particular state, a judgment like this can result in garnished wages, seized assets and potentially even federal income tax liability.

Negotiating With the Owner:
Often the biggest difficulty in buying a pre-foreclosure property is getting the homeowner’s attention. Because a Notice of Default is public record, other investors probably will have contacted the owner. Many investors write letters or send postcards expressing their interest. We recommend against these passive approaches. Instead, we find it more effective to speak directly with the owner. This helps instill confidence and trust in the owner.

Often the best option for an owner in default is to sell the home to obtain relief from financial duress. But many owners make a concerted effort to hang on to their properties for as long as they can. When the auction date approaches, however, the homeowner is likely to be motivated to close a sale. We recommend you keep in regular contact with him. Make sure he knows you will immediately buy the house if he is willing to accept your price.

When talking to distressed homeowner, be courteous and demonstrate your understanding of his situation. Be prepared to adopt a consultative approach with the goal of reaching a mutually beneficial agreement. This way, you may help the owner through the problem while deriving no immediate gain for yourself. This may seem discouraging, but you may still benefit . It is not uncommon for a distressed homeowner to solve his problem only temporarily and ultimately to default again. Having helped him the first time, it’s possible he will seek your counsel again. As more such deals come your way, you may find yourself in multiple good opportunities.

Closing the Deal:
Before you sign an agreement with an owner, be sure the title of the property is clear. Never release money until your real estate attorney confirms this. If everything checks out, you and the owner need to sign a Real Estate Purchase and Sale Agreement. At this point, you should arrange your financing and ensure that the foreclosure process has been stopped. If all goes well, you will have bought a property at below market value

Another good way to purchase foreclosures is after an auction, when the lender itself is the successful bidder or there are no bids at all. Either way, the lender becomes the legal owner and the property is considered one of its non-performing assets. These Bank Foreclosures are often referred to as either REO Real Estate Owned. The key thing to remember is that banks typically are not in the business of managing real estate, nor do they want to be. This can create an opportunity to buy at a great price.

Where is the Opportunity?
There are several reasons why banks want to quickly sell their REO bank foreclosures. Here are the top three:

1. Non-Performing Assets
Banks generally little interest in managing and disposing of real property. So they want to rid themselves of REO bank foreclosures. But this does not mean they want to lose money in the process. Their goal is to quickly recoup the capital they tied up in these loans and reuse the funds profitably.

2. Carrying Costs
Once ownership of the property reverts to the bank, the expenses of holding the foreclosed property quickly begin accruing. These include property taxes, maintenance expenses and insurance premiums. They continue to mount until the property is sold, putting pressure on the bank to quickly dispose of the property. In most cases, the longer a bank holds a property the more unprofitable it becomes.

3. Property Damage
Since most REO bank foreclosures are vacant, there is increased risk of property damage from vandals and/or bad weather. Again, this creates additional incentive for a bank to quickly move this foreclosed property out of its possession.

Pros and Cons of Buying Bank Owned Property
Let's start with the benefits of buying directly from the lender. First, most REO bank foreclosures are sold with a clean title, meaning that all junior liens are resolved. You can buy the property without worrying about a redemption period or any unexpected judgments.

The second benefit: There usually is an abundance of bank foreclosures nationwide, which creates significant opportunity for good deals. While this doesn’t mean that it’s easy to find below-market REO bank foreclosures, it does mean that if you persist you will be able to find properties that meet your criteria.

The last key benefit: Banks may be flexible with terms and conditions when selling foreclosed property. While banks will always attempt to get the best deal possible, the fact that they are a lending institution gives them the flexibility to be creative and negotiate the terms and conditions of the loan.

The key disadvantage: The purchase process is quite simple with most bank foreclosures having clear title. This sounds like a benefit, but ultimately its effect is to attract more buyers. This creates more competition.

Closing the Deal
Inevitably you’ll encounter competitors as you look for a great deal on a bank foreclosure. Here are tips to give you an edge:
First, we recommend establishing personal relationships with the lenders in your area. This can provide just the advantage you need against another qualified buyer. Second, if you have an excellent credit rating, make sure the banking contacts know about it. Bankers want to ensure that a foreclosure property doesn't return to their inventory. Your strong credit history can cause them to gravitate toward your

The auction is the stage of the foreclosure process in which the default or preforeclosure phase of the property has ended. The lender now wants to recapture its losses by selling the property to the highest bidder.

Proceeds from the auction go to the lender who initiated the foreclosure action. Usually this is the lender holding the first mortgage. When the first mortgage holder's position has been satisfied, any additional funds are used to settle other remaining obligations, if any. If all encumbrances against the property are resolved, any remaining funds are given to the homeowner.

Purchasing at auction is a great way to buy houses at bargain prices but you prepare to act quickly.

Preparing for the Auction:
Before you bid in any auction it’s vital that you do a title search. The goal is to determine whether there are any liens or judgments against the property. These can include unpaid personal property taxes, civil lawsuit judgments and state and federal tax liens. If you present the winning bid, you will be granted title to the property, and will inherit all such liens. This can significantly affect the value of your purchase.

You also must be prepared with financing. Cash or cash equivalent will be required at the auction. If you are the winning bidder, a 5 to 10 percent deposit is required at the conclusion of the auction. The balance is usually due within a few days.

We recommend that you attend at least two auctions prior to making your first official bid. This will make you comfortable with the process and give you the confidence you need. It is easy to get caught up in the excitement of the bidding process and make a poor decision. Composure and discipline are essential.

The Opening Bid:
Prior to the auction, the trustee establishes the opening bid. This is determined by summing the remaining loan balance, court costs, interest and back taxes, legal fees and liens and judgements. The winning bidder normally must satisfy all these expenses at closing. If no one bids above the opening bid, the lender may take back the property. It then becomes a Bank Owned or REO Real Estate Owned Property.

How to Bid:
Approach the auctioneer, give your name and discreetly show him the amount of your cashier’s check or cash. The auctioneer will note your name and the limit of your bidding ability. Bids over this recorded amount will not be accepted from you unless you evidence an additional check or cash during the bidding.

Prior to the opening bid, the trustee will read aloud the legal description and terms of sale for each property. This is a technical step. Don't expect the trustee to provide information about the quality or characteristics of a property.

The Winning Bid:
If yours is the highest bid and the hammer strikes the third time, you own the property. At this point, you’re expected to make the deposit of 5 to 10% of the purchase price. The remainder of the purchase price will be required sometime within 24 hours and 30 days afterward. Your deposit is non-refundable and all sales are as-is and final.

While you are now the owner of the property, in some cases it may be possible for the owner to buy back the property. The period is called the Redemption Period, which gives the original owner the opportunity to redeem himself. In most cases, this doesn’t happen since if the owner were in a financial position to buy back the property he likely wouldn’t have defaulted in the first place. But it can happen, so be aware of this issue.