However, it's not quite as easy as it seems. If you walk into the investor market wanting to "do foreclosures," without understanding the entire process, you could wind up in trouble. For example, while all short sales are foreclosures, not all foreclosures are short sales, and while REOs are not short sales, some short sales can wind up as REOs.
Let's start at the beginning, then, with three basic definitions:
1. What is a Foreclosure?
When a property is in foreclosure, the owner has stopped making payments, and the lender has given the borrower a written Notice of Default that the payments must be brought up to date or the property will be sold off. The notice is a public document (which is why so many websites offer foreclosure lists). It normally takes about two missed payments for a lender to issue a Notice of Default, but not always.
If the owner doesn't respond to the Notice of Default or make the payments needed to reinstate the mortgage, the lender can apply to the courts to take back the title the property so it can then be auctioned off or otherwise disposed of. This doesn't happen right away, though.
Foreclosure auctions are usually public -- in fact in many places, foreclosure auctions are still done on the front steps of the Courthouse once a week.
2. What is a Short Sale?
A short sale happens once a home is in foreclosure, but before the property goes to public auction. Short sales are attractive to investors, because lenders often agree to take less than what is owed on the property. The idea here is that you are saving the lender time and money by stopping the legal foreclosure process and taking the property off the lender's hands.
But there are pitfalls to short sales. For example, if multiple mortgages are involved an investor must strike a deal with all lenders. That may leave little, if any, profit margin, depending on how heavily the property is mortgaged. And, even if a lender does agree to an offer up front, they can still change their mind.
3. What are REOs (or Real Estate Owned)?
If no-one bids high enough to meet the lender's price at auction, the foreclosure completes and title transfers to the lender. Real Estate Owned means the property is owned by the lender.
Some investors see REO homes as the best way to buy property because there are no emotions involved: it's strictly business between the investor, their agent, the lender, and its agent. And because most lenders aren't landlords (nor do they want to be), investors can often get a very reduced price.
But not always. Sometimes there are hidden fees, like unpaid taxes, penalties, etc., to contend with. Other times lenders aren't willing to negotiate the price down from market, or close to market. This is especially true in areas where home values have fallen further than lenders want to acknowledge.
As with any other kind of investing, education and experience will be crucial. However, having a skilled Buyer's Rep -experienced in negotiating with lenders will be KEY to your success!
Right of Redemption
In Tennessee there is a two year right of redemption in the event that a property is sold to satisfy debts. [See Tenn. Code Ann. 66-8-101.] In order to exercise that right of redemption, “Any debtor whose interest in real estate has been so sold, and is subject to redemption, may redeem the interest by paying to the purchaser, or to anyone claiming under the purchaser, the amount bid or paid by the purchaser, with interest thereon at the current composite prime rate as published by the federal reserve board as of the date of purchase per annum, together with all other lawful charges.” - Tenn. Code Ann. 66-5-106. If the purchaser cannot be found, then the funds can be paid into the court clerk’s office of the county in which the property sits. - Tenn. Code Ann. 66-8-113.
If you have questions about the right of redemption, you need to speak with your attorney.[SOURCE: TAR’s Legal & Ethics Hot Line Attorneys]
