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What is a foreclosure?
In real estate, a foreclosure occurs when a mortgagee (someone who borrows money to buy a house) goes into default, meaning they can no longer make payments to the bank or private lender. Since the bank isn't making any return on investment from their loan, they go into the legal process of taking back the house.
Why do foreclosures occur? Well, whenever the bank loans money to borrowers, they're always using the house as collateral to secure the loan. Not only are lenders looking for steady, sufficient income history and a good credit score, they also make sure that -- if things go wrong, as they so often unfortunately do -- the bank can sell the house to recoup any money they might have lost.
What is a foreclosure sale?
A foreclosure sale is what happens after the bank officially goes through the process of foreclosure and now they're ready to put the house up for sale. First, the foreclosed home is put up for auction. Typically, there's a minimum bid that's set at how much money the mortgagee had left on the loan, and the home goes to the highest bidder.
If the house doesn't sell at auction, the bank must find other means to sell, usually by finding a realty agency to represent the home. This type of sale is often referred to as "REO" for "real estate owned."
Foreclosure sales were very prevalent following the 2008 subprime mortgage crisis. Since so many borrowers failed to make payments in 2008, those homes went into foreclosure. Then, in 2009-2010 (and even for a while after), those homes were scooped up at a fraction of their sale price just a couple years before.
Are foreclosures always a good deal?
You might be thinking, "Wait a second! The bank doesn't want to pay property taxes on those homes, right? They already paid enough money to go through with the foreclosure, and they don't want to hold the house any longer than they have to. They're the definition of motivated sellers! I can get my dream house at bargain bin prices!"
Well, yes and no. Many foreclosed homes come with issues, some minor and some major. Sure, you might have no trouble replacing a sink, but if the roof is caving in and there's a septic tank failure, you might think twice about whether or not you can grab your dream home at a discount.
With that said, you're also typically competing with real estate investors and contractors at foreclosure auctions. In other words, these people know what goes into fixing up the distressed property and since they have the skills and capital necessary to do it. Before buying a foreclosed property, make sure you know what you're getting into.
A foreclosure occurs when a home buyer fails to make payments to the bank, and the bank goes through the process of seizing the home so that they can sell it to recoup some of the money they've lost from the loan.