Can you get a deal on a foreclosure?

The short answer is yes. A recent study conducted by RealtyTrac, a firm that gathers and analyzes foreclosure data, found the foreclosure prices paid on national basis averaged a 22% discount from what comparable houses where selling for during the same time period.

These are the states with largest average discount compared to market value at the time of sale:

Alabama: $133,834 - 40% discount
Pennsylvania: $110,936 - 39% discount
Indiana: $99,255 - 36% discount
Ohio: $90,300 - 35% discount
Missouri: $144,768 - 32% discount

States with the smallest discounts:

Hawaii: $657,211 - 15% discount
Washington: $288,397 - 16% discount
Virginia: $338,912 -16% discount
Massachusetts: $290,835 - 17% discount
California: $437,813, - 17% discount

So, speaking just averages buying foreclosures you can buy a house anywhere from a 17% to 40% discount depending upon the area, the particular house, the competition and your effort and abilities.

Definition

Foreclosure is the process where a lein holder takes possession of the collateral that has been pledged for a mortgage loan or trust deed loan. The foreclosure process is triggered by the homeowner (mortgagee) defaulting on making payments.

The foreclosure process has both federal and state laws which you need to be aware if you are a party in a foreclosure. One of the first things you need to be aware of is the process in the state where the property is and the state laws that govern the foreclosure process. The major differences from state to state are these:

1. Redemption period available for borrower

2. Whether the loan and state laws allow for a deficiency judgment. Deficiency judgment allows lenders to pursue the borrower personally for any amounts not received from selling the property. (the collateral) A deficiency judgment also includes the right of the lender to recover legal fees and other costs associated with the foreclosure process.

About half the states allow non-judicial foreclosures, and about half are judicial foreclosure states with a handful of states allowing either. With states that permit either, the instrument used to secure the loan will dictate which procedure is used. In non-judicial states, the instrument used is often called a trust deed. There are three parties to this arrangement. The borrower or trustor, the lender or beneficiary, and the trustee a third-party who holds the title on behalf or in trust for the beneficiary to secure the performance of the note and trust deed. The trust deed contains a power of sale clause spelling out the terms and when the trustee can sell the property should the borrower default. With non-judicial foreclosures, the lender is prohibited from recovering a deficiency judgment. There are some exceptions to this rule, however, depending upon the state and the conditions. For instance, in California, a lender has the right to pursue a deficiency judgment if the property was refinanced. In practice, even if deficiency judgments are permitted, it is rare for a lender to pursue them. The reasoning is that if the borrower couldn't pay their mortgage, they probably are uncollectible and the expense and time involved for the lender would be futile. Spending good money on something where the likelihood of obtaining a return is unlikely.

A judicial foreclosure requires court action. The mortgage or trust deed does not have the power of sale clause, therefore, the lender or lien holder must take the borrower to court for a breach of contract to recover the unpaid balance of the mortgage. In most judicial foreclosures, deficiency judgments are permitted.

The three junctures where a purchase can be made in the foreclosure process.

1st Juncture - Pre-foreclosure

A Notice of Default (NOD) is filed in the county where the property exists. This is public information and can be accessed at the county recorder's office. There are a number of services that collect and aggregate the county recorder's data and make this information available on the Internet saving you the trip to the courthouse. During this period of time, the property is often times for sale as the borrower is trying to keep the foreclosure process from progressing and minimize the potential damage to his/her credit rating. The pre-foreclosure period can last up to 120 days, depending upon the state and whether or not the borrower has negotiated with the lender to get the loan reinstated. During this period a potential buyer would be dealing directly with the owner. If the process continues, the property moves into the second phase - the public auction of the property. More on pre-foreclosure...

2nd Juncture - Public Auction

It's important to make the distinction between the public auction administered by the county court and that is part of the foreclosure process and the auctions that are being promoted to the public where properties are being auctioned off that are owned by the bank or government agency are being sold. Auctions that are part of the foreclosure process, the title is still in the name of the borrower and the purpose of the auction is to provide lien holders the opportunity to exercise their right to acquire ownership and possession of the property. If this is a property you have an interest in, if you haven't already, this is the time to review the loan and lien history and check for what other encumbrances the property might have. More on public auction...

3rd Juncture - REO's or Real Estate Owned by the Bank or Government Agency

A recent study of foreclosures found that about 75% of properties that go into foreclosure never make it to the public auction. The reason for this is the foreclosure gets "cured" meaning the loan was brought current, paid off or the lender has agreed to some type of modification. The study further found that the more affluent the area, the greater likelihood the property would be saved from the auctioneers gavel and the foreclosure process halted before auction.

If the lender does take ownership of the property, either through an agreement with the owner during pre-foreclosure or at the public auction, the lender will usually want to re-sell the property to recover the unpaid loan amount. More on REO's...