Foreclosures work differently from state to state, but the basics are pretty standard: When a homeowner starts missing mortgage payments, the bank gives notice to the homeowner and to the local government that the loan is delinquent. After a time, the bank is allowed to commence a repossession process that can result in the house being auctioned off to the highest bidder. The process can take weeks or months to play out; anywhere along the way, a homeowner retains the power make good with the bank. Frequently, homeowners in trouble with the banks are willing to sell their homes to private buyers at a discount to market value in order to preserve what little equity they have left.

Let’s backtrack just a little bit in order to examine what happens just before a property goes to foreclosure: Whenever someone purchases a house, the normally obtain a mortgage with a small down payment for the price the house. The mortgage is secured by the property, and if the buyer defaults or is unable to payback the loan, the bank (or lender) has the right to foreclose and take ownership of the house. At this point, most banks sell the house to recover their loan principle. Banks do not like doing this because it costs them money and they are not equipped to really sell houses.

This means that the savvy real estate investor can take advantage of the foreclosure proceedings by closing a deal at the stage before which is called pre-foreclosure.

Pre-foreclosure is the period of time just before the bank repossesses the house in question. During this period, the bank is filing the required paperwork to become the lawful owner of the house. Each state has its own laws regarding foreclosure, and the pre-foreclosure period can be as short as 21 days in Texas, to as long as 3 months in California. At the end of the pre-foreclosure period, the house may go up on auction at the “courthouse steps,” where many investors go looking for a good valued investment property.

To invest in a pre-foreclosure property, investors must get the property before the public auction or the bank actually takes title to the house. This point is the perfect time to negotiate with the homeowner, and structuring a lucrative deal without having to compete with other investors. Without having to bid against other investors, pre-foreclosure specialists are often able to acquire properties far below market prices.

There are techniques, tips and workarounds which I cover in my courses and my workshops and which every real estate investor really needs to know. At this stage though it is sufficient to point out that the successful real estate investor is good at making a rapid assessment of a deal’s value and then getting and getting out in the shortest possible time with the greatest amount of money.

It really is that simple, if you know how. 

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When the lender files a Notice of Default, your options are limited. That is why it is better for you to call your lender before falling behind on your payments, because lenders are often reluctant to work out repayment schedules after foreclosure proceedings have been commenced.

You will be given a certain time period to bring the payments current, pay the costs of filing the foreclosure and stop the foreclosure. This is called reinstatement of your loan. If you cannot make up the missed payments and the lender will not work with you, here are a few other options to stop foreclosure:

    * Sell Your Home.
      Interview real estate agents to get an opinion of market value and average DOM to sell your home. You might be tempted to hire a discount broker, but many sellers feel they need the exposure and marketing that full-service brokers offer. Compare both to determine which best meets your needs and time frame.

    * Consider a Short Sale.
      If your home is worth less than the amount you owe, you might be a candidate for a short sale. A short sale affects credit but it’s not as bad as a foreclosure. You or your agent will need to negotiate with your lender to find out if the lender will cooperate on a short sale. This is called a pre-foreclosure redeemed.

    * Sign a Deed-in-Lieu of Foreclosure
      This is called deeding the home back to the lender. The homeowner give the lender a properly prepared and notarized deed, and the lender forgives the mortgage, effectively canceling the foreclosure action. Lenders tell me that deeds-in-lieu of foreclosure affect credit the same as a foreclosure.

Whatever you decide you should usually not make a single move before speaking to a foreclosure expert. Because they deal in this area day in day out they have a much clearer understanding of the foreclosure process and the way it can be stopped or ways you can be helped to move on from a home that’s dragging you down than any real estate agent or lawyer.

Real estate investors who are actively involved in the foreclosure market have the right connections, motivation and knowledge that’s needed to make sure things get done right, move fast and stay legal.

Facing foreclosure is never a pleasant thing to have to go through but, provided you have a real estate investor who is adept at foreclosures by your side, it can be a lot less painless than many would have you believe. 

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So much attention has been given lately to the number of foreclosures that we should expect to see in the United States over the coming years that few people have stopped to consider why exactly foreclosures happen in the first place.

I am going to be a little glib here and say there are about as many reasons why foreclosures happen as there are home owners defaulting on their loans but that would not help answer the question so I am going to take a more general view and see if the reasons a foreclosure happens can be fitted into different categories.

So let’s take things from the beginning and see if we can form a good picture. The obvious answer of course is money, or rather the lack of money. But the reason a home owner who has attained the Great American Dream of buying his own home can no longer afford it is a lot more complicated.

Broadly speaking the reasons area: 1. Ill-Health. A change in the health of the family, an accident, serious illness or anything similar can so adversely affect the finances of a family that they then begin to go into a tailspin and that can very easily lead to missed mortgage payments and foreclosure.

2. Loss of a job. This is common and it only leads to foreclosure if it is so catastrophic that it places the home owner in a new income bracket where he is unable to get another job equal in pay to the one he has lost.

3. Bad finance management. This is more serious than it may at first seem and it does not reflect just on the home owner. Quite a few home owners took advantage of adjustable rate mortgages (ARMs) which allowed them to buy a home and borrow money at very advantageous rates which, however, after six months or a year began to sky rocket and the rest is history. Here the fault often lies with lenders who make it difficult for borrowers to understand what they are getting into and, which, have over the past year been found guilty of using high-pressure tactics to sell mortgages at any costs.

These three reasons, collectively account for more than 90% of the foreclosure cases that we see come into the market.

It is evident from them that foreclosures are never a cut and dried affair of someone being unable to make payments and left to themselves, they never really manage to get out of this morass. It is exactly at this point that the savvy real estate investor steps in and acts as a catalyst in a situation that often finds him creating a win-win scenario for everybody and that is what is satisfying about being involved in the foreclosure market.

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The rise in foreclosures that we are experiencing this year poses a challenge our economy simply cannot afford to ignore. For real estate investors the deal is always to find ways to create value out of situations which are seemingly bad.

I say seemingly because there is no cloud without a silver lining and the foreclosure crisis is the perfect example. Let’s take a worst case scenario: the number of foreclosures in the coming months manages to hit new records which means that the housing industry will undergo a slump and mortgage lenders will suffer significant losses.

Despite the cut in interest rates by the Fed (the largest single cut in 25 years as a matter of fact) the crisis of confidence that’s being undergone by the money markets is sufficient to affect a lot more than just the housing industry which means that suddenly the dreaded ‘R’ word becomes a lot more plausible and a recession looks like it might be on the cards.

Left to its own devices this is exactly the scenario that will pan out. What becomes a saving characteristic is the fact that real estate investors act as a catalyst buying up properties that are gridlocked due to foreclosure and releasing them back in the market while working out deals that free up cash for mortgage lenders and, possibly, existing home owners.

In the process they create movement in the lifeblood of the housing market: new home owners who suddenly find they can purchase properties at prices they could not afford to before. These properties which if they had been left without the intervention of real estate investors would have become black holes in the local (and national) economy suddenly become sources of further wealth, helping money go round through purchases, repairs and development.

Foreclosures are part of our economic model and when they get out of hand they can seriously hurt the economy. At this stage it has become evident however that they are one of the symptoms and not the cause. By becoming as active as possible in foreclosures real estate investors help do one of the hardest things possible in the housing market: break gridlocks and move things forward, helping everyone along the chain make the money they deserve.

It all starts with finding the right foreclosures to promote and the right market to promote them in and the right type of buyers to take these properties off your hand and, lucrative as it may be, it is also just the right kind of thing our economy needs right now in order to rebound.

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Those real estate investors who are active in the area of foreclosures already know two things both of which are proven by statistics and careful analysis: first the number of foreclosures that hit the market is a clear indicator of the state of the market itself and perversely enough the relationship is exactly the inverse. That means that the more foreclosures that come into the real estate market the better the market itself is growing and behaving in terms of money-making opportunities for all concerned. Second (and this is the fly in the ointment) the number of foreclosures that hit the real estate market must not rise above a certain level of homes being foreclosed or a certain percentage of the total number of home sales.

Real Estate investors who know how to read the market know that the moment the second occurs the first does not.

This is exactly what happened in the second half of 2007 and has sufficient momentum to continue to occur in the first few months of 2008. The reason the number of foreclosures increased beyond what the system can safely accommodate and beyond the level which it is normally designed to handle is down to predatory lending practices by specific mortgage lending providers, many of which have now, quite rightly, gone out of business.

The number of homes being foreclosed upon is also increasing for another reason. The moment foreclosures went above a certain level the system went out of kilter and a finely-tuned mechanism designed to act as a safety valve that stops the real estate market from overheating suddenly became a liability that threatened to destabilize our whole economy.

With the housing market in such a turmoil it was not too long before the cold wind of a credit crunch started to blow this way and make the hard cash from investors that mortgage lenders need in order to make loans and create profits, hard to come by.

This meant that people who would normally be getting mortgages and buying houses are suddenly finding it difficult to obtain credit and because lending affects more than just those who want to buy houses the economy itself is now beginning to feel a very cold wind blowing down its spine.

Interestingly enough what might just save everything from going belly up is the very thing that caused the problem in the first place. Get enough foreclosures happening at the right price and suddenly you have a whole new raft of first-time buyers entering the market and ready to revitalize it as they buy furniture, insurance, home furnishings, DIY staff and lawnmowers.

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