Note that the term "foreclosure" can mean different things to different people. There are three parties involved:
1. lender: a bank, trust or private institution that fronts the money
2. trustee: an impartial 3rd party that holds the title/deed to the home (title company)
3. trustor: the borrower of the money to buy the property, signs promissory note to lender and deed of trust to trustee
The process goes along normally when you pay back the bank over time and on your last payment, the bank notifies the trustee that you've fulfilled your obligations and then the trustee sends you the deed/title to you home. However, when things go wrong, there are different types of foreclosures involved:
1. if you default on the promissory note, the lender notifies the trustee that you've done so. The trustee then auctions off your home for the balance of the loan
and gives that total back to the lender. This is often known as a trustee sale or lien sale. The deed/title goes to the winning bidder. The caveat here is:
- buyer's premium, typically 5%, which you don't face if buying through traditional means
- there is often little time to inspect the property, you buy it as-is
- bidding emotions, you may get too caught up in the moment and bid more than prudent, and the repair bills may end up throwing your final costs over FMV
- going up against pros, developers, contractors and investors. They have inside access to info that you may not know
- large cash-outlay, you have to pay entire bid that day (or within days at most, terms based upon auctioneer)
2. if the auction does not fetch the balance of the loan, the trustee repossesses the property and gives it and the deed/title back to the lender (bank). This property then becomes an REO, real-estate owned or bank-owned property
. Once the bank owns the property, they typically will do a facelift rennovation and resell it at market value
. The bank is the owner of the property, they've invested time and money in taking it back and prepping it. They aren't dumb and will get as much money for the property as possible in the current market.
Don't get #1 and #2 confused, they are two completely different processes. The vast majority of discounts and fortunes to be made lies in the #1 track. Most suckers fall for #2 when they see ads saying "buy real-estate for discounts" or "bank-owned REO foreclosures". They are really buying from just another seller in the marketplace and the bank's no different than Billy-Joe down the street who's trying to get maximum-dollar for his house. Even worse, is that banks and investors don't have to provide all the disclosures about a home that a private-owner does. Buyers fall on their emotional swords and often don't hire their own comp study, appraisals and inspectors to verify pricing.
The real profits are in the #1 technique and those don't show up in advertisements. Just the barely noticeable postings required by law; one or two lines in the classifieds.