What Is Foreclosure in Real Estate?

What Is Foreclosure in Real Estate?

Posted by Clay Schmidt on Jan 22, 2022


Real estate investors know that there are a broad range of investment options out there for them when they’re looking to expand or diversify their portfolios. While purchasing a property that’s listed for sale and flipping it or renting it out is certainly one viable option, there are other tools that investors have at their disposal. One such example is found in purchasing foreclosed properties. Understanding what foreclosure is, how it works, and how foreclosures can benefit you as a real estate investor is an important aspect of tapping into all the resources that you have at your disposal.

What Is a Foreclosure?

A foreclosure is the result of a borrower failing to make the mortgage payments associated with a property that they have purchased. For instance, if a person purchases a $150,000 home and they put $30,000 (20%) down, their mortgage is for $120,000. Depending on the terms of the loan, the borrower will owe the bank or other lending institution a monthly payment that includes principal and interest for a predetermined period of time. If they fail to make those payments for a certain period of time, the lender can begin the foreclosure process on the property. This legal action, once completed, makes the lender the new owner of the property.

How to Find Foreclosures

Sometimes, in real estate investing, finding the right property at the right time can be an important part of the process. Whether you’re looking for multi-family housing structures or foreclosures, location has always been and will always be one of the most important aspects of real estate investing. However, since foreclosures are rarely marketed in the same way as traditional properties for sale, they’re occasionally harder to find.

It’s not unusual for real estate agents to have working relationships with banks and other lending institutions. When an agent works closely with a lender, they often refer clients to one another. However, these relationships also give agents inside information about foreclosures that the lender now owns. Contact some agents in your area and ask them if they know of any foreclosures. They may also be able to find some in their MLS.

You can also contact lending institutions yourself to find out about their foreclosures. Lenders are usually eager to share the information, as they don’t want to own property, so they will usually respond quickly to your request for more information.

Finally, some real estate apps include foreclosed properties on their search databases. However, the information that they provide is not always accurate, so you may run into some false leads.

Benefits of Investing in Foreclosures

One potential benefit associated with investing in foreclosures is found in the fact that they are often cheaper than properties that are being sold in a more traditional manner. Banks, credit unions, and other lending institutions don’t want to own properties. Their purpose is to lend money to homebuyers who pay them back more money than they borrowed. Since they don’t like owning properties, you can often get deals on these properties.

Additionally, the properties that are foreclosed on may be turnkey. People lose these homes because they can’t make the payments. Lenders usually act quickly to sell these properties, so they don’t really have time to deteriorate.

Investing in foreclosures provides another option for real estate investors of all experience levels. The reduced prices of the subject properties can make them appealing to investors. If you don’t have foreclosures in your portfolio, it may be worth considering as you evaluate your investment options.

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities. All real estate investments have the potential to lose value during the life of the investment. All financed real estate investments have the potential for foreclosure. Cash flow or income are not guaranteed.

Download our guide to real estate investing

Download our guide to real estate investing
Download eBook


Download our guide to real estate investing

Download our guide to real estate investing

Learn new ways to use real estate to pursue your wealth goals.

By providing your email and phone number, you are opting to receive communications from Realized. If you receive a text message and choose to stop receiving further messages, reply STOP to immediately unsubscribe. Msg & Data rates may apply. To manage receiving emails from Realized visit the Manage Preferences link in any email received.