I am interested in foreclosure properties, but I keep hearing terms about types of foreclosure properties that I don’t understand. Could you explain and clarify them?

Of course, there are the three major categories of foreclosure properties that one might encounter. Understanding the differences among them and the benefits and disadvantages of each can be helpful in getting the best deal in real estate and investments. The three major types of foreclosure properties are pre-foreclosures, foreclosure sales, and bank-owned sales.

Great, let’s start with pre-foreclosures. Could you understand what a pre-foreclosure purchase of a real estate property means?

Yup, that’s what we are here for. Pre-foreclosure property is a property held by an owner who is facing or close to defaulting on a loan which would result in foreclosure. In order to buy a pre-foreclosure property, buyers have to approach the owners facing foreclosure directly to negotiate a sale. This type of approach might be too foreign and uncomfortable for some investors. Also, sometimes these property owners facing foreclosure will offer to sell their property, getting leads through their friends or through ads in the newspaper. There are also some services which will connect pre-foreclosure sellers and buyers. Buying a pre-foreclosure takes the most effort and legwork in finding them and or approaching real estate owners, but pre-foreclosure sales offer the greatest chance at getting a great bargain on a property well below market price.

Next could you explain what foreclosure sales are?

Foreclosure sales happen when a loan goes to default, and the parties involved agree to entrust a trustee to sell the property so that the lender can recover some of the money that he is owed. Sometimes the property is sold through a foreclosure property auction service. The local recorders office and online property listings are ways by which to find these foreclosure sales.

With these foreclosure sales, you must be aware that the sale is fast tracked to happen, so you only have short periods of time to inspect the conditions of the property. Make sure to show up at the open house or schedule a time with the listing agent or else you might not be able to assess the conditions inside. Bringing a local contractor and real estate agent will help you better assess and determine the living conditions and the property values of the neighborhood.

With most foreclosure sales, the buyer is required to pay cash or have already gotten approval from a lending company for a financing loan before heading to the foreclosure sale. These foreclosure property auctions are a great chance to get a great bargain without having to go through the discomfort of approaching property owners for pre-foreclosure sales.

Okay, I understand those two now. Could you elaborate on a bank-owned sale?

A bank-owned sale or REO sale involves sales of properties in which loan default has occurred and the bank takes control of the real estate property. Bank owned REO sales also occur in cases where the property has failed to sell through a foreclosure sale or auction as previously described, and the bank now decides to take control of the property and sell it itself.

With bank owned foreclosure property sales, you get a very motivated seller in that the bank wants to recover as much money as they can as fast as they can. The downside is that these banks are often quite savvy in the local market so the chances of getting a great bargain below market prices are much lower. The bank also spends a lot more getting the word out about bank owned property and has many more savvy bank insiders which also contributes to the disadvantages of buying an REO sale. With all these factors, however, there is still good chance of getting a good deal on a real estate investment through bank owned sales, so you should still investigate the bank owned and REO sales opportunities in locales you are interested in.