You see bits and pieces foreclosure deals all around. The buzz is that they are very profitable. But what is really happening? How do foreclosure deals work?

It all starts when a borrower misses a few payments. At some point the bank decides to foreclose and files the appropriate legal documents with the county. The clock is then ticking. The timing varies by state - some states have months and some states have weeks - between the official filing and the actual foreclosure auction. It is during this period that investors can help the defaulting homeowner by buying the property. The intention of the investor is to buy the house for the loan amount and let the home owners walk away without a foreclosure on their credit record and maybe some cash, depending on the equity in the house. This is great for all ? the owners' credit is still decent, they get some money to start over, the bank gets paid and the investor gets a house with built-in equity.

Sometimes, however, the house is worth less that the loan amount. Then the investor, with the permission of the homeowner, works with the bank to take less money than is owed for the property. This is called a short sale. Why would a bank do that? If they continue through the months and months of the foreclosure process, the bank has funds tied up that they can't use. That costs them money. Plus, once the entire foreclosure process is finished, they still have to sell the house to recoup their money. Since very few foreclosed houses are ready for showings, they might need to pay for things like paint, carpet, lawn mowing and realtors. Most banks would prefer to get their money now (even if it is less) than wait.

The next opportunity to purchase foreclosure property is at the county foreclosure sale. At this point the investor does not need to have contact with the defaulted owner. While the foreclosing lender enters the opening bid, anyone is welcome to top that bid. But they must have cash to cover their bid. Obviously, if the price is low enough this is another way to profit.

The final way to succeed with foreclosures is once to purchase an REO (Real Estate Owned). REO are properties that have completed the foreclosure process and the bank or lender holds title. Most major lenders list these properties with a real estate agent and try to sell for market value. However, the banks' main goal is to dispose of the property, not to wait for a full price offer. So, often these properties are sold for less than market value.

If done correctly, foreclosures can be very profitable. But just because a property is somewhere in the foreclosure process, don't automatically assume that it's a great deal. There are risks ? money can be lost on a foreclosure deal. It takes education and research to mitigate the possibility of losses and turn tricky situations into high profit deals.

More info on your stop foreclosure information search:

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