Foreclosure
The legal process by which a lender repossesses a property when the borrower defaults on the loan.
Definition
Foreclosure is the legal process through which a lender forces the sale of a mortgaged property to recover the outstanding loan balance when the borrower stops making payments. It is one of the primary sources of distressed property inventory that investors target.
The foreclosure process varies by state but generally follows this path: (1) default — borrower misses payments; (2) notice of default — lender files public notice; (3) pre-foreclosure — a window for the borrower to reinstate the loan or sell; (4) foreclosure auction — property sold to highest bidder; (5) REO — if not sold at auction, the property becomes bank-owned.
Investors participate at multiple stages: contacting distressed homeowners during pre-foreclosure, bidding at the courthouse steps auction (often requiring cash and accepting title as-is), or purchasing REO (bank-owned) properties through agents. Each stage has different risk profiles, competition levels, and potential discount depths.
Related Terms
Short Sale
A sale where the lender agrees to accept less than the full balance owed on the mortgage.
REO Property
Real Estate Owned — a bank-owned property acquired through foreclosure when it didn't sell at auction.
Due Diligence
The investigation and verification process buyers conduct before committing to a real estate purchase.
Title
Legal ownership rights to a property — the bundle of rights that come with owning real estate.
Earnest Money
A deposit paid by the buyer to demonstrate serious intent — held in escrow until closing.