1.  Pre-foreclosure

When a homeowner misses several payments on his note and doesn't communicate with his lender, the lender will foreclose on the home.  Depending on which state you're in, this involves either a trustee sale, or a judicial foreclosure. Let me explain.

In some states, known as "trust deed" states, the lender becomes a trustee of the property on the trust deed.  So, if the owner stops making payments, the trustee (lender) can simply order a trustee sale - no judicial proceeding necessary.

In mortgage or judicial foreclosure states, the lender must file a judicial action, and the courts must order a foreclosure sale.

Pre-foreclosure refers to any time leading up to the foreclosure sale. Typically, state laws call for advertising of properties that'll be sold at a sheriff's auction, for several weeks leading up to the auction date.

So, if you're chasing pre-foreclosure homes, you're probably watching the public notice to find these deals.  And, you must deal directly with the owner. Who probably isn't too excited to work with you, because every other investor in town has been calling him and mailing to him.

2. Foreclosure Sale

This is the point at which home is sold at auction by the sheriff or trustee. If you've never been to an auction, you should go - if only for the entertainment value!

Typically, the auction of a home will be over and done with in under a minute. The lender will be bidding on the home, in order to protect his interest.  Sometimes lenders will bid against others; other times if there's another bidder, the lender will remain silent so that they can recover at least part of their financial interest in the home.

The winning bidder will normally have to pay with cash or certified funds on the day of the sale.

Buying at a foreclosure sale is a bit risky -- because 1) there is no provision for seeing the inside of the home prior to the sale; and 2) because there may be other superior liens outstanding on the home, that carry over to the buyer.  Although a foreclosure sale wipes out any subordinate liens (say, second mortgages or mechanics' liens), property tax or IRS income tax liens will often survive the foreclosure sale.

Also - some states have what's called "rights of redemption".  This allows the original homeowner to recover the title to the home for up to six months after the foreclosure sale.  Check your state's redemption rights before you even think of buying at a sheriff's auction!

3. Post-foreclosure

If the lender buys back a home at auction, it becomes known as a REO - Real Estate Owned by the lender.  It's carried as an asset on the lender's books... but in reality, it's a huge liability.

They typically want to get rid of them quickly - both to recover at least a part of their money, and to reduce the risk that the house will be vandalized or otherwise damaged, thereby further eroding its value.

Once they've gotten a sheriff's deed (a few weeks to a few months after the auction), they will typically list the property with a local Realtor.

For most people, the safest time to buy a foreclosure home is in stage 3 - Post-foreclosure. Here's a few reasons why.

1. It's listed with a Realtor, so you have the ability to tour the home and decide what kind of repairs are required.
2. You're dealing with a motivated seller - a lender that wants the house off its books as quickly as possible.
3. You're able to finance the purchase of a REO home with any type of normal purchase money - conventional, FHA, VA. Often times, you're able to build in additional cash beyond the purchase price to finance repairs.

Your lender will likely require that you buy a title insurance policy at closing, to protect the lender's interest. I highly recommend you also buy an owner's policy of title insurance (usually optional) when you're buying a home that's been involved in a recent foreclosure action. This will protect your interest, in any event that might occur.

Absolutely.

However, don't assume that just because it's a REO, it's priced below its market value. Some lenders would rather get a price near retail, even if it means they have to sit on it a few months in order to do so. (Unfortunately, this rarely works. Most of the time it sits on the market ad infinitum, and the lender keeps inching south with the price, until it's finally priced as low as it should have been to start with!)

If your objective is to save money (why else would you buy a REO?), it's your responsibility to assure that you are, in fact, saving money.

Have your Realtor check recent comparable sales ("comps") in the neighborhood. Be sure to discount from those comps for any repairs needed to the subject home. And be liberal with your figures. I counsel people to add 10%-20% to their repair estimates, to account for the little niggling details that often crop up while work is underway on a home.

Cosmetic updates

It used to be that most foreclosed homes were in pretty rough condition. But we're seeing houses in way better condition coming to market in the last couple years. I've seen a number of Cincinnati foreclosures recently that only need minor, cosmetic updates. Paint and carpet, for instance.

These homes are really suitable for "retail" buyers - i.e., buyers who are looking for a home to live in, rather than fix-n-flip.

According to RealtyTrac (which has the nation's largest database of information on distressed properties), foreclosures in April 2009 were up 32% nationwide from a year earlier.

The number of Foreclosures in Cincinnati seemed to be somewhat less than the nationwide numbers.

Who knows what'll happen in the future. Perhaps some of Obama's initiatives will make it easier for people to keep their homes.

If you're thinking of buying a foreclosure home, I'd recommend you start looking today.... rather than waiting till next week, or next month. Here's why: we may never again see the "triple whammy" opportunity for home buyers that's there right now: 1) low home prices; 2) low interest rates; and 3) a wide selection of homes to choose from.

And - my best advice to you - get a good Realtor before you start looking for homes. A Realtor can dramatically simplify your home purchase, and relieve a lot of the stress of buying a home.

And if you need help finding a Cincinnati foreclosure home, please look me up! I offer a free list of Cincinnati foreclosures on my website.