Using Foreclosures to your Advantage


Foreclosure is the result of past due payments on a mortgage. If you lapse in mortgage payments to your lender, the lender will take the necessary steps to get their money – by selling the house.

Educate yourself before attempting to buy a foreclosure property. There are many classes, seminars, books, and websites that have valuable information. Research the local tenant/landlord laws regarding defaulting on payment and eviction processes. Find out if there are rent controls in your area.

Foreclosure law is created and managed at the state level. It is in your best interest to learn about your state’s laws regarding foreclosures.  Some states have deeds of trust, others have mortgages.

There are three phases of foreclosure:

  1. The pre-foreclosure phase
  2. The auction of a foreclosure
  3. The post-foreclosure phase

In the post foreclosure phase, the lender is paid – one way or another. Remember that the primary interest of the lender is for money, not property.

To make money on foreclosures, you need to be involved in the process before they public learns about them. The public usually learns about foreclosure property when it is announced in the newspaper. For the homeowner, missing two or three months of payments will start the foreclosure process moving. After another 4-6 weeks, the case is handled over to the lender’s attorney, who will send additional letters, and set a cure date.  The cure date is the last date that the property owner can settle payment before the property goes up for sale at a foreclosure auction.

You will have more leverage the earlier you involve yourself in the process. Leverage is the ability to take a little money and use it to do large scale things. You have the ability to create a win-win situation for the property owner, yourself, and the lender. The property owner will get out of an embarrassing situation and help protect their credit, you will make money, and the lender will get paid.

First, you will need to learn about the different security instruments, determine which is used in your situation, and then determine the method of foreclosure. There are various laws and foreclosure processes depending on the state or country where the property is located.

The two types of security instrument used in the

United States

are mortgages and Deeds of Trust.

Type of Security Instrument

Method of Foreclosure


Role Definition


Judicial, Non-Judicial, Power of


, Entry & Possession

Debt security is created by putting a lien on the property.

Borrower = Mortgagor

Lender = Mortgagee

Deed of Trust

Power of




trust deeds involve Judicial)

Trustee holds title for the beneficiary as security for repayment.

Borrower = Trustor

Lender = Beneficiary

Intermediary = Trustee

A Closer Look at Judicial Foreclosures

Judicial foreclosures are handled within the court system. This type of foreclosure using takes the longest time to process because the court must agree with the final bid to avoid exorbitant discrepancies between the property value and the bid.

What happens in judicial foreclosure? First, a pending action, called lis pendens is filed with the local Clerk’s Office. This is the official notice that the action of foreclosure has been started against the mortgagor.  After lis pendens is filed, no other liens can be added. Before involving yourself in any way with a foreclosure, be sure that all parties involved – the owners, renters, lease holders, creditors, etc. – have been given notice properly. If the notice process is not handled correctly, existing tenant leases may still be legally binding after the foreclosure process.

The second step of a foreclosure is the appointment by the court of a referee. The referee posts the property foreclosure auction in the local newspaper, typically under the section called “Legal Notices.” The referee handles the auction.  He will announce the terms and conditions of the sale, and open the bidding at an “upset price.” The upset price is the opening bid amount, and is determined by the court. The factors included in determining the upset price include the mortgage balance, back taxes, interest, liens, court fees, legal costs, and any judgments on the property that were in place before lis pendens went into effect. 

The winning bidder will get a Certificate of Sale after the auction. On some properties, there is still the chance that they deal can fall through. If the deal included a Statutory Right of Redemption clause that remained in effect past the auction, this could be the case. Without this clause, the property deed (sometimes called the Sheriff’s Deed) goes to the winning bidder.

An In-Depth Look at Non-Judicial Foreclosures / Power-of-Sale

Non-judicial foreclosures are the same as the power-of-sale method of foreclosure. These foreclosures do not involve the court system, and the trustee can sell the property title outside of the courts if payments have not been made on the loan. This will avoid a long, drawn out court proceeding. Non-judicial foreclosures are sometimes called a “Trustee’s



How do non-judicial and power-of-sale foreclosures work? First, the Trustee files a “notice of default”, and officially notifies the Trustor. The sale occurs, and it is final. In trust deed states, there are no rights of redemption or deficiency judgments.

As a protection for yourself, have your lawyer include a contingency clause that gives you the right to perform inspections following the sale. Be sure it allows for adequate time to complete the inspections.

A recommended reference for a state-by-state guide to security document and foreclosure methods is Your Fortune in Foreclosure: Today’s Best, Low-Risk, High-profit Real Estate Investment, by Fredy Bush, Carl Hunter and Bruce Erb, pages 199 to 204.

What is a Deed in Lieu of Foreclosure?

We have all heard the saying, “the early bird gets the worm.” This theory stands true when investing in real estate, too. How do you get the inside scoop on real estate investments?

1.    Look for newspaper real estate listings that say either “For Sale by Owner” (also called FSBO), or something like, “Must sell, all offers considered.”

2.    Find out the owner’s contact information on properties that appear to be abandoned, and call them.

3.    Research probate court cases that involve divorces, deaths, and business failures to determine if there is real estate left on the table.

4.    Contact relocation companies and title insurance companies to ask for real estate referrals.

5.    Act on the foreclosures listed in the newspaper.

6.    Watch the lis pendens or Notice of Default filings at the country courthouse or the Clerk’s Office. You can either do this yourself, hire a college student to do it for you, or buy them from a list service. The first two ways give the highest returns usually, because the list service has a large distribution list.

7.    Internet real estate services. Try www.therealestatelibrary.com as a starting point.

8.    If you want to buy your primary residence, look into HUD and VA. Their websites have links to government-linked sellers of repossessed homes.

9.    Find out about investment clubs in your area.

10. Open accounts at area banks. Network with the bankers and lenders because they handle mortgages, loans, and are in contact with property owners in financial distress.

11. Focus on real estate agencies. When home owners know foreclosure is eminent, they usually contact an agent to try and sell the property on their own. Let area agents know you are a real estate investor.

12. Become a licensed real estate agent, and create a niche in foreclosure properties.

13. Contact law offices that specialize in real estate law, because they are the ones that distressed homeowners contact at the beginning of foreclosure proceedings. Although attorneys can’t disclose information because clients are protected by a code of ethics, the attorney can keep your business cards for referrals.

14. Market yourself by posting an ad in the newspaper of the area you want to buy in. Make up flyers and post them on public boards, car windows, and canvas the neighborhood, looking for people considering selling their home.

15. Ask builders and contractors if they have any leads on prospective sellers.

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I would like to hear more about what you would like to learn, leave a comment below!

Nancy Geils, Owner/Founder Investing with the Stars




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