Everyone has heard of foreclosures but no one wants to experience one first hand - unless you’re an investor that is! Foreclosures offer you, the investor, the opportunity to help someone out of a bind and make a pile of money at the same time.

A foreclosure occurs when the home owner defaults on their loan (or mortgage) and the lender (usually a bank) puts the home into foreclosure in an effort to get their money back. There are three basic stages in the foreclosure process, and each one provides the investor with opportunities to make large profits.

The first stage of a foreclosure is called the pre-foreclosure, and this can be the best time for an investor to step in and make some serious money. What basically happens at this stage is that the homeowner has fallen behind on their payments and has received a letter from the bank stating that they’re going to foreclose unless the owner brings their payments up to date.

The last thing a homeowner wants is to go into foreclosure as they will lose their house and their credit will be trashed. As an investor you step in and offer to bring the debt up to date, and in return the homeowner enters into an agreement with you whereby you gain control of the property (including all the built-in equity), and the homeowner continues to make payments to you!

If the homeowner is unable to get their payments back on track within a certain period of time, the bank starts the foreclosure process. At this point the house is considered in foreclosure and the bank now has the right to sell the house to recover the cost of the mortgage. A date is set for the sale of the home at auction, at which time the homeowner will be evicted (if they haven’t already moved out). At any point during this period the homeowner can still pay back the bank and keep ownership of their house.

If the auction date arrives without the debt being paid back to the bank, then the foreclosure enters the third stage, the auction stage. Auctions are held at a government building, usually the courthouse steps, and any foreclosed homes that still have money owing on them go up for auction. You can get some fantastic deals at real estate auctions, but you will need financing sorted out ahead of time as there is no financing clause that enables you to get out of the deal later on if you have second thoughts.

If the house doesn’t sell at auction then ownership of the home reverts back to the bank. It now sits in their books as REO, or Real Estate Owned. Banks hate having houses just sitting there doing nothing, as they represent bad deals and lost money. These, however, represent fantastic deals for you, the real estate investor!