The foreclosure process can be very long and starts when the mortgagee (the home owner) is at least 60 late on their loan payment. There can be many reasons why someone is 60 days late, ranging from: Out of the country on vacation and forgot to pay, to lost their job and can't make the payments.

This is very important to understand because not every property that shows up as "in foreclosure" or "pre-foreclosure" is necessarily a buying opportunity. Some owners will, thankfully, get a new job, renegotiate the terms of their loan, or in some way save their house. Still others will be in denial until the day the of the sheriff auction.

Foreclosure Websites
Here is a good place to discuss foreclosure websites such as Foreclosure.com and Realty Trac: these sites are generally good research tools. They collect public information about mortgages, such as when someone's mortgage is 60 days late, triggering the lender to file a "lis pendens" to give notice that they will start the foreclosure process, and put in on their respective websites in a fairly organized fashion. The problem is that they sometimes present the loan balances as "available for." When you see dollar amounts, these are simply the loan balances for the corresponding loan that is at least 60 days late. There may be more than one loan and/or lien on a house AND someone who's financial life is falling apart may not be willing to sell their home for 25% of its value just to get out from underneath. A discount is often available, but all things within reason.

Pre-Foreclosure and Short Sales
So what happens when someone is in pre-foreclosure? If the owner admits to themselves that they need to sell, but they owe more than their home is worth, they may try to do a "short sale." What this means is that the bank would have to agree to release the lien (mortgage) on the home for less than what they are owed. This is where many people get a good deal on a home. The seller (homeowner) doesn't really care what they sell the home for because they won't be getting any money at the closing anyway. It is all about convincing the bank that it is in their best interest to "sell short" rather than take the property back via foreclosure. The downside is that this process can take a long time. It typically takes 60 to 90 days to get a response from the bank on the sale price. This wouldn't be that big of deal, except that after 60 to 90 days, the response may not be answer you are looking for and you could be back at square one. Also remember, these sales are typically "as is". You can have an inspection (which I always recommend), but the seller will not be any position to fix anything you find.

Sheriff Sale - Foreclosure Auction
If a property doesn't sell during the "pre-foreclosure" stage, it will eventually go to a sheriff auction at the county court building. The bank that holds the primary loan will typically make the opening bid (generally for the balance of their loan). If no one outbids them, they acquire the home. This auction is open to the public, but be aware that when you buy a home this way, you inherit any and all liens against the house and you take the home "as is" as well as "sight unseen". It is possible that you purchase a home for $100,000 only to find out that the previous onwers never paid the contractor for the $75,000 addition they put on last year. Guess what? He still wants to be paid and you get that honor. Same is true for any back real estate taxes that may be due.

Bank-Owned Foreclosure
Assuming the bank takes the property back in the auction, they will go to work to clear any outstanding liens (i.e. other loans, real estate taxes, back assessments, mechanics' liens, etc.). The will then assign it to a real estate agent and a property manager to make sure the previous owner has left, remove any belongings left behind, turn off the heat and water (called winterizing), cut the grass/ shovel the snow, etc.

Finally, they have a couple real estate agents do assessments as to the value of the property and list the home on the MLS to sell.

The upside of purchasing a foreclosed property (also called REO - Real Estate Owned by the bank) is that you can get a good deal b/c they really just want to get rid of the property. Unlike a "Short Sale" the banks will typically respond to your offer within a week or so. Also, the liens have typically been taken care of.

There are few downsides, such as:

* Homes have been winterized (no water or heat on) so you will have to pay to turn those on during your inspection and appraisal, then pay to have them turned back off.
* Banks won't typically pay for a survey, which your lender will require, so budget a few hundred extra dollars for closing costs.
* They will only prorate back real estate taxes at 100%, so you end up paying the overage.
* They make you sign a ridiculous addendum that is decidedly in favor of the seller (don't sign this without having an attorney read it first).