Foreclosures are not a very recent phenomenon. Even in earlier times, when the term was not coined, foreclosures occurred; however, with a few alterations in the process as we know it today.
When people borrowed money or anything that had monetary value from a lender and were unable to pay it back, the asset that was used as a security deposit would get taken away from them. This asset was usually land, which would then either be kept by the lender for personal use or he would sell it off to recover his money and maybe make a profit.
In today’s scenario, the basic structure of foreclosures has remained the same; however, the term and process has gained quite a few different dimensions, especially the point of view of each player involved in the process of a foreclosure. Although a foreclosure is quite an unfortunate occurrence, looking at one today, you will notice that it has gained more of a profitable angle to it.
Foreclosures are now a legal process and understanding the different steps of the process is quite essential if you are stepping into the world of foreclosures.
The Process of a Foreclosure
For starters, it is necessary to understand what precedes and what succeeds a foreclosure; let’s take a simple example.
You have been working at company X for a few months now and you wish to buy a home. Your salary from company X falls short to buy one and hence you decide to solicit a loan from a bank. Your loan gets approved, you buy a home and you keep making your monthly loan payments towards the bank.
You have been paying off your loan for months now and you still have some more to go, but unfortunately, you lose your job and have no source of income to repay your loan anymore. You also have no savings and neither are you able to find yourself another job.
As stated legally, the asset that you deposited for security, in this case your home, will be taken away by the bank since you stopped making payments towards your loan. Your real estate property now belongs to the bank and it gets termed as “foreclosed” property.
The bank now puts up your property on public auction so that they can recover the loan money from the person who buys your property.
So you can see the three major players involved in the process of a foreclosure are:
– The defaulter who couldn’t pay back his loan
– The lender (bank)
– The buyer
The defaulter is the most unfortunate player in the foreclosure game because he only faces a loss. Quite a number of people in the United States have been suffering from foreclosures because of the current economic scenario.
However, there are ways in which foreclosures can be avoided, such as:
Selling off your property before it is foreclosed and using the money to pay off your loan
Renting your property and using the money to pay off the loan (Both of which can be done if your family/relatives or friends can put you up in their homes till you pass your financial crisis)
Inviting a paying guest into your property.
If none of the above three options are possible for you, facing a foreclosure is inevitable.
The lender is in a no loss, no gain situation because he is able to recover the money that he lent. However, at a public auction, it is possible that there will be a marginal difference between the money to be recovered and the money at which the asset is sold, thus, leading to a marginal profit.
The buyer undoubtedly makes a profit because he buys the asset at a much lower rate than its market price, since the loan amount usually never exceeds the market price. It is this fact that is being taken as a basis to make a profit.
Big hedge fund companies that are entering the real estate market in the United States have been using foreclosures as a base to make their profit. They scan the market for foreclosed properties, make sure they are present at every public auction and with a good bid, they buy the property. After observing the real estate market conditions, they sell the property to an interested client for its market value, thus making a good profit on the deal.
An individual buyer, not associated with any real estate company, may also buy the foreclosed property and he may either use it for himself, or sell it or put it up for rent. Either way, buying a foreclosed property is a profitable deal, even if it means dealing with the emotions of those who have lost the property.
For a thorough understanding of foreclosures, the legalities involved and how you can avoid your own property getting foreclosed or making the most from a foreclosure, you may refer to the book Foreclosure Profits System by Jeff Adams.