What is a Foreclosure

Simply, foreclosure is the process by which a homeowner’s rights to a property are forfeited because of failure to pay the mortgage. If the owner cannot pay off the outstanding debt or sell it via short sale, the property then goes to a foreclosure auction. If the property does not sell at auction, it becomes the property of the lending institution.

It helps to remember that the word “homeowner” in this case is actually a misnomer – they are actually borrowers. When someone buys a home, they sign a thick packet of papers – one of which is the mortgage, or deed of trust. This document puts a lien on the purchased property, making the loan a “secured loan.”

When a lender loans you money without any collateral (credit card debt, for instance), it can take you to court for failure to pay, but it can be very hard to collect money from you. Lenders often sell this sort of debt to outside collection agencies for pennies on the dollar and write off the loss. This is considered an “unsecured loan.”

A secured loan is different because, although the lender may take a loss on the loan if you default, it will recover a larger portion of the debt by seizing and selling your property.

Here are the five stages of foreclosure:

Stage 1: Missed payments

Foreclosure is a lengthy process, with specifics varying from state to state, but it all starts when a borrower fails to make timely mortgage payments. This is usually due to hardships such as unemployment, divorce, death or medical challenges.

Other times, a borrower may decide to stop paying the mortgage intentionally because the property might be underwater (mortgage exceeds the value of the home) or because he’s tired of managing the property. For whatever reason, he can’t or won’t meet the terms of his loan.

Stage 2: Public notice

After three to six months of missed payments, the lender records a public notice with the County Recorder’s Office, indicating the borrower has defaulted on his mortgage. In some states, this is called a Notice of Default (NOD); in others, it’s a lis pendens -- Latin for “suit pending.” Depending on state law, the lender might be required to post the notice on the front door of the property. This official notice is intended to make the borrower aware he is in danger of losing all rights to the property and may be evicted from the premises.

Stage 3: Pre-foreclosure

After receiving Notice of Default from the lender, the borrower enters a grace period known as “pre-foreclosure.” During this time – anywhere from 30-120 days, depending on location – the borrower can work out an arrangement with the lender via a short sale or pay the outstanding amount owed. If the borrower pays off the default during this phase, foreclosure ends and the borrower avoids home eviction and sale. If the default is not paid off, foreclosure continues.

Stage 4: Auction

If the default is not remedied by the prescribed deadline, the lender or its representative (referred to as the trustee) sets a date for the home to be sold at a foreclosure auction (sometimes referred to as a Trustee Sale). The Notice of Trustee Sale (NTS) is recorded with the County Recorder's Office with notifications delivered to the borrower, posted on the property and printed in the newspaper. Auctions can be held on the steps of the county courthouse, in the trustee’s office, at a convention center across the country, and even at the property in foreclosure.

In many states, the borrower has the “right of redemption” (he can come up with the outstanding cash and stop the foreclosure process) up to the moment the home will be auctioned off.

At the auction, the home is sold to the highest bidder for cash payment. Because the pool of buyers who can afford to pay cash on the spot for a house is limited, many lenders make an agreement with the borrower (called a “deed in lieu of foreclosure”) to take the property back. Or, the bank buys it back at the auction.

Stage 5: Post-Foreclosure

If a third party does not purchase the property at the foreclosure auction, the lender takes ownership of it and it becomes what is known as a bank-owned property or REO (real estate owned).

Bank-owned properties are sold in one of two ways. Most often, they are listed with a local real estate agent for sale on the open market. Zillow lists bank-owned properties for sale. Also, some lenders prefer to sell their bank-owned properties at a liquidation auction, often held in auction houses or at convention centers.

Types of Foreclosure

In the United States, individual states follow either a judicial or non-judicial foreclosure process, typically depending upon whether they are a mortgage state or deed of trust state. However, you may safely assume that all states allow some form of judicial foreclosure process.

We have highlighted below some important points to remember about each type of foreclosure. This is a general overview and in no way represents each process in its entirety.

Judicial Foreclosure:

• The lender seeks to foreclose by filing a civil lawsuit against the borrower and serving the borrower with a formal summons and foreclosure complaint.

• The foreclosure process is handled through the local court system. The court appoints a referee to conduct the foreclosure auction on the courthouse steps.

• The lender records a lis pendens with the county clerk where the property is located. This lis pendens becomes a lien on the property and gives notice to all of the pending foreclosure auction.

• The court grants a judgment permitting the lender to conduct the foreclosure auction.

• The Notice of Foreclosure Sale (NFS), which announces date, time and place of the auction, is published and sometimes posted (depending on the locale) for a certain period of time prior to auction.

• Generally, the borrower can stop the foreclosure by repaying what he owes up to the moment of sale.

• The process can take from four to eight months to complete if no one raises any legal objections to the foreclosure.

Non-Judicial Foreclosures:

• Followed in deed of trust states. A deed of trust conveys an interest in real property to a third party (the trustee) to hold as security for repayment of a debt.

• The trustee has the authority to initiate foreclosure proceedings by virtue of a power of sale clause included in the mortgage or deed of trust.

• The trustee records a Notice of Default (NOD) with the county clerk where the property is located. This document gives notice of an impending foreclosure and also grants the borrower a period of time in which to object to the lender’s claim or pay what he owes.

• The borrower may not stop the foreclosure after the expiration of this time period.

• Following the expiration of a pre-determined amount of time (which varies from state to state), the trustee records a Notice of Trustee’s Sale (NTS) with the county clerk. This notice establishes the date, time and place of the foreclosure auction.

• It can take up to 12 months to complete a foreclosure, depending upon the state.

It is important to remember that neither judicial nor non-judicial foreclosures are “one size fits all.” Each state follows its own established foreclosure laws and procedures. It is strongly suggested that you consult with a foreclosure specialist in your state to protect your rights during a foreclosure.

Short Sale vs. Foreclosure

If you are having difficulty affording your home during hard economic times, you may be able to avoid foreclosure through either a short sale or a deed in lieu of foreclosure. While neither option is as desirable as staying in your home, they do at least help you avoid the costs and hassles associated with foreclosure.

What is a short sale?

A short sale is the sale of your home for an amount less than the amount you still owe on your mortgage. The sale does not have to be to your lender, but your lender has to agree to it. Borrowers choose this option when they cannot afford to continue making monthly mortgage payments and cannot pay the difference between the sale price and the unpaid mortgage amount. However, the borrower is not freed from his obligation to repay the remaining mortgage balance unless the lender agrees. Many lenders require that disadvantaged borrowers provide proof of economic or financial hardship before agreeing to a short sale.

  • Advantages of a short sale:
    • You no longer have a mortgage payment.
    • You can buy another home in 2 years, rather than 5-7 years, if you foreclose.
    • You save yourself the costs and fees usually associated with foreclosure.
  • Disadvantages of a short sale:
    • Your credit report may be damaged if your lender reports the short sale to credit monitoring agencies.
    • If you owe money to more than one creditor (for example, if you have taken out second and third mortgages on your property), they will also have to agree to the short sale because they, too, will be paid an amount less than what you owe them.

What is a deed in lieu of foreclosure?

A deed in lieu of foreclosure transfers ownership of your home to your lender to pay off your loan and avoid the foreclosure process. Prior to an ownership transfer, the lender and borrower must enter into a settlement agreement that includes a sale price for the home that is at least equal to its fair market value. The borrower must also enter into the settlement agreement voluntarily and may be required to provide written proof that he is doing so.

  • Advantages of a deed in lieu of foreclosure:
    • Completely satisfies your loan obligation.
    • Your credit rating is not as damaged as it is by a foreclosure.

However, issues arise when there is more than one lien holder on the property. If you have outstanding judgments or other unpaid mortgages, your lender would be assuming responsibility for payment of these outstanding obligations if it purchases your home by deed in lieu of foreclosure. Under these circumstances, your lender may wish to foreclose on your home in order to wipe these liens out.

New option: Deed for lease or mortgage to lease

Another alternative to foreclosure, but relatively new, is “deed for lease” or “mortgage to lease” program. This rent-back program was introduced in 2009 by Fannie Mae and banks are trying to implement their own programs.

This rent-back idea is tied to the deed in lieu of foreclosure program in which the lender would have to agree to allow the defaulting borrower to stay in the home as a renter for one to three years. Not everyone qualifies for this program, since it would be at the discretion of the lender.

Bottom line

If you are having trouble making your mortgage payments, you should discuss these options with your lender as soon as possible. It could save you the time, trouble and hardship of going through the full foreclosure process.

Foreclosure Buying Overview

Interested in buying a foreclosure? You're not alone. Between January 2006 and May 2012, more than 6.5 million U.S. homes were lost to foreclosure, offering additional inventory alongside traditional real estate properties. Due to the distressed nature of the properties, they offer great appeal to a variety of buyers who are:

  • Looking for a bargain.
  • Looking to create rental properties for revenue.
  • Hoping to “flip” houses by fixing them up and selling them for profit.

But, while a foreclosure may benefit one side of the transaction – buyers – it is heartbreak for the borrower/homeowner. Foreclosure is a process in which a bank, a mortgage company or other lien holder seeks to take a property from a owner to satisfy a debt. The bank or lender may actually take ownership of the property or have the property sold to pay off the debt. As a result of the foreclosure, the owner loses whatever rights he or she had in the property.

Before you begin the hunt for foreclosure properties, take a look at the different stages of the foreclosure process where buyers can find potential bargains on properties:

Stage 1: Pre-foreclosure

In this stage, the property owner has been given legal notice that the foreclosure process is about to begin. He has missed mortgage payments and has been issued a Notice of Default (in non-judicial foreclosure) or lis pendens (in judicial foreclosure). The owner may be working to cure the default or may be hoping for a pre-qualified cash buyer to help him avoid the impending foreclosure.

Be aware that buying a property in the pre-foreclosure stage means approaching the borrower/ property owner – generally before the property is listed for sale –  and offering to buy the property outright. The benefit to the borrower/property owner is that he can walk away with something to show for any equity he has in the property and may be able to avoid damaging his credit history.  

Stage 2: Foreclosure auction

If the loan is not reinstated – meaning the property owner did not pay back the loan to avoid foreclosure – the property will likely be sold at a foreclosure auction. Successful bidders often are required to pay in cash and may not have much time to research the title and condition of the property beforehand. Most auctions require cash payment at the time of purchase. 

Stage 3: Bank-owned property or real estate owned (REO)

If the lender takes ownership of the property, either through an agreement with the owner during pre-foreclosure or at the public auction, the lender will eventually re-sell the property to recover the unpaid loan amount. The property is then known as “bank-owned property” or “real estate owned (REO).” The lender usually clears the title and performs necessary repairs, but the process can test the patience of a lot of buyers. So, if you’re in a hurry to buy, this type of real estate transaction might not be for you. 

Rules governing the processes and timelines for foreclosure vary from state to state.  Unless you’re an expert in real estate law and transactions, it's a good idea to seek the counsel of an attorney and/or real estate agent familiar with foreclosures.

Buying a Bank-Owned Property

A bank-owned or real estate owned (REO) property is one that has reverted to the mortgage lender after the home fails to sell in a foreclosure auction.

Once the bank owns the property, it will handle eviction, if necessary, pay off tax liens and may do some repairs.

REOs are a significant part of the housing market and can be great deals for buyers, but there are some things you need to know before investing in one.

Where to find bank-owned properties (REOs)

There are several ways to find bank-owned properties:

  • MLS - Most lenders list their REO properties on the Multiple Listing Service (MLS), so any real estate agent can help you identify REO offerings in your area.
  • Bank websites - Some banks have an entire department set up to sell REOs, and sections of their websites are dedicated to their listings.
  • Online specialists - Zillow has foreclosure listings, for free. You can find foreclosure properties by using search filters on Zillow's search and maps page. Most other online foreclosure listing services charge a fee.

Get an appraisal and inspection

Be aware that REO properties are not automatically bargains. Banks are in business to make money, so they price their homes competitively. Some REOs are discounted because of severe damage or location, while others may not sell for much of a discount at all. Get an independent appraisal to determine a home's true market value.

Additionally, understand that REOs, some of which have been vacant for months or even years, generally are sold “as-is” with no warranties of any sort. Hire a professional to inspect the home before committing to purchase.

Real estate agent David Nelson, who works for Virginia Beach, VA-based Wainwright Real Estate, says he recently worked with a client who ignored his suggestion to have a home inspection.

"We could see that some tiles were messed up and the shower valves were gone, but he was confident he could fix that himself,” says Nelson. “What he didn't realize was that someone had reached into the walls and pulled all the copper plumbing out of the house. It cost him $50,000 in repairs - all because he waived his right to an inspection."

Title search

Banks generally clear the title before listing a home – but never assume this is the case. Search public records for liens and outstanding taxes, then hire a title company to run a full, insured title search before closing the deal.

Be smart about money

Get pre-qualified for a loan if you're serious about buying. Even better: get pre-approved by the lender that owns the property.

Understand that a significantly damaged home may limit your financing options. VA loans, for example, can be more difficult to obtain if the property isn't in move-in condition.

If the property you're considering is in good condition, the fact that it's an REO shouldn't make it more difficult to qualify for a loan. Similarly, an REO property in decent shape should not be subject to a higher mortgage rate.

Do your homework before making any offers. Make certain your offer price is comparable to the recent sale prices of similar homes in the neighborhood. Be sure you add in the costs of renovation.

Patience required

Bidding on an REO isn't quite like making an offer on a privately-owned home, where owners generally respond quickly.

It's typical for an REO offer to be reviewed by several individuals and companies, which means it can take weeks to get a response. Banks must demonstrate to shareholders and investors that they worked hard to get the best price for the property, so it's likely your offer will be met with a counter offer. If the lender isn't willing to negotiate on price, ask for a lower interest rate or a reduction in closing costs.

Even after an agreement is reached, the bank may make its acceptance contingent upon corporate approval within five to 10 days.


If your credit is good, you may find your bank is willing to loan the full price of the foreclosure – maybe more if extensive repairs are needed. Some lenders require a 10 percent down payment if the foreclosure is going to be used as a rental. You may also find you need to turn to a private lender to finance your REO property purchase.

Buying a Pre-Foreclosure Property

The pre-foreclosure stage can yield some real bargains, but most experts agree it is the most difficult stage during which to purchase a distressed home.

Be aware that a pre-foreclosure property is not necessarily for sale. The pre-foreclosure stage is the period between the time in which a Notice of Default (in non-judicial foreclosure) or lis pendens (in judicial foreclosure) has been issued to the homeowner and after the property is sold at a foreclosure auction.

The owner may be working to cure the default, or he may be hoping for a pre-qualified cash buyer to help him avoid the impending foreclosure.

Here are 10 tips to guide you through the search for and purchase of a pre-foreclosure home:

1. Begin the hunt

One of the trickiest aspects to buying during this stage of foreclosure is finding properties. That’s because some of these houses are not yet on the market. Start your search by Or, check your local newspaper for foreclosure notices. You may also want to market yourself with online postings, signs, fliers or postcards (“Willing to pay CASH for your home.”)

2. Drive by

Once you find a property, go see it so you can get a better idea of its location and condition. This could facilitate a casual meeting with the owner or a chatty next-door neighbor. Remember, the owner is probably still living in the home, so be judicious.

3. Get a status update

It is not uncommon for homeowners to resolve their financial problems, so you need to do your homework and verify whether the property is still in default. The trustee who filed the paperwork to initiate the foreclosure should be able to provide this information. Or, contact a local foreclosure specialist to help you.

4. Valuation

Check public records to determine the outstanding loan balance and liens on the home and consult with local real estate agents. Additionally, Zillow offers two data points that can be helpful to ascertain value:

  • The "Foreclosure Estimate," which is the price we predict a property will finally sell for if it’s listed as a foreclosure (bank-owned property or real estate owned).
  • The Below value, which is a number that represents the difference between two estimated market values as calculated by the Foreclosure Estimate. The Foreclosure Estimate incorporates foreclosure data. 

5. Do some math

Subtract the costs you will encounter as a buyer (loan balance, liens, insurance) from the estimated value of the property. If you enter into negotiations with the owner, you can use this figure as your breakeven number.

6. Reach out

Once you’ve done considerable homework, it’s time to contact the homeowner by letter or phone call and let him know that you’re interested in his property. Remember that homeowners facing foreclosure are distressed, so enormous amounts of tact are required. Try to arrange a meeting so you can get a better look at the property and potentially discuss a possible sale.

7. Walk through

If the owner is willing, take a tour of the property. Determine how much you’d need to spend on repairs and subtract that amount from your breakeven number. If you’re not comfortable estimating repair costs, consider taking your contractor along for the tour – just remember to be considerate of the owner’s circumstances.

8. Negotiate

Many factors will figure into your offer, including regional real estate appreciation and the potential for increasing value. Ideally, your offer will be considerably lower – perhaps 20 percent or more – than your breakeven number. Be creative. For instance, an owner may be more willing to flex on price if you allow him to stay in the property for 30 to 45 days while he finds a new place to live.

9. Put it in writing

Once a deal has been reached, draw up a purchase agreement. If that’s not within your realm of expertise, turn to a real estate agent who specializes in foreclosures or an attorney for assistance. Make sure that the agreement makes the deal contingent on a full title search conducted by a title company and a professional inspection of the property.

10. Money matters

An escrow company, which acts as a third party, can manage the transfer of money and property ownership.


Not all homeowners will welcome your interest in their pre-foreclosure home – and that’s fine. Others, however, will realize that, by selling during this stage, they may be able to salvage some equity and minimize damage to their credit record.

Buying at a Foreclosure Auction

Foreclosure auctions, conducted on courthouse steps, in convention centers across the country and even at the property in foreclosure, can be intimidating.  The trick to avoiding foreclosure auction pitfalls is to do your homework.

1. Understand the process

Many buyers have never attended a foreclosure auction before – either a large auction in which dozens of properties from across a large geographic region will be sold or a smaller trustee auction. If you’re entertaining the thought of buying a foreclosure, it's smart to attend a few auctions as an observer.

  • Observe the buyers – Sometimes auctions are as much about theatrics as they are about business transactions. You may see some buyers dressed in suits standing near the auctioneer in an effort to convince other bidders they’re representing the lender; such posturing may scare other attendees away from a bidding war.
  • Find out requirements – Contact the attorney or auctioneer to determine how much money you need to bring to the auction as this varies from state to state. Many auctions require bidders to bring along a certified check for $5,000, made payable to the auction company. This is to show the auction firm there is a legitimate intent. The successful bidder will sign his check over to the auction company while losing bidders simply redeposit their checks.

Some larger auctions will have representatives from several large mortgage lenders in attendance. Bidders also need to be aware that large auction firms, such as Williams & Williams and The National Auction Group, charge either a flat fee or percentage of the sale price for their services.

In some cases, you must bring a percentage of the winning bid price in the form of certified funds, the balance being due in 30 days. You’ll also find states where the entire balance is due the day of the sale.

2. Research, research, research

In most regions, notices about upcoming auctions are published in legal newspapers or the legal section of the local paper. Be aware that auction dates often change or are postponed, so be sure to confirm specifics with the lender’s attorney or the trustee.

  • Narrow your area – Choose a few neighborhoods to research. Drive by the listed auction properties located within those neighborhoods. Beware the neighborhood that is peppered with foreclosed properties; this may be a sign that values are still dropping there.
  • Study the home – You probably won't be able to get into the home, but you should be able to tell if anyone is living there. If it is occupied, there's a good chance the home has working plumbing and electricity, but this is not guaranteed. What does the exterior look like? If it's a disaster, there’s a chance the interior will be, too. Expect the house needs, at the very least, cosmetic upgrades: new carpet, paint, appliances and kitchen cabinets. If the house is vacant, peek inside the windows.

3. What to bid?

If you win this property at auction, will you live in the house? Fix it and resell it? Rent it out? Your plans for the property will affect your maximum bid price.

  • Find out what nearby similar properties have sold for in recent months.
  • Calculate necessary improvements, based on a “worst-case scenario” (replacing plumbing, electrical, etc).

Remember that your bid at the auction is absolute; there is no backing out, there is no home inspection waiver. If you think basic repairs for a house will run $15,000, you don't want to end up paying $130,000 at auction if the move-in ready home next door is listed at $140,000.

Make a set of photo and info sheets for each property, along with your top bid, just to avoid confusion on auction day.

4. Other tips

Veteran auction-goers provide these hints for making the most of your experience:

  • Be timely. Most auctions don't last long; if you’re five or 10 minutes late, you may miss the whole thing.
  • The first few properties offered often sell for less because bidders are trying to figure out pricing patterns. If your dream property is one of the first auctioned, you may be in luck.
  • Listen up. You may hear the auctioneer say something like: “This property is sold subject to all liens and encumbrances.” That means the winning bidder is responsible for past-due taxes and liens imposed by contractors or the Internal Revenue Service. Veteran bidders conduct title searches on the properties in which they’re interested.
  • Don't get caught in a bidding war. Determine what you’re willing to pay before the auction and don’t bid any higher.
More info: http://www.charlestoncounty.org/Departments/MasterInEquity/LegalIntrst/ForeclosureBidding.htm

Effects of Foreclosure on Your Credit Rating

There is no question that your credit rating takes a hit if you foreclose on your home. Late mortgage payments, short sales and deeds in lieu also make a negative impact. If you are experiencing hard economic times and are faced with the reality of one of these options, take heart that the damage is not permanent. With time and patience, you can rebuild your credit rating. We summarize below the ways that foreclosure, short sales, deeds in lieu and late mortgage payments affect your credit rating and how you can repair the damage.

  • Foreclosure. Your credit score can drop by as much as 200 to 300 points if you are forced to give your home up to foreclosure. This drop carries with it a ripple effect that impacts your ability to purchase a new home and obtain car loans, credit cards, even insurance. Are you looking for a new job? Then be aware that some prospective employers refer to credit scores as an indication of personal responsibility. You may be passed over if employers perceive you as untrustworthy based on your financial history. All is not lost, however, if you keep your other financial obligations in good standing. Foreclosure can remain on your credit report for as long as seven years, but its effect will diminish over time, perhaps in as little as two years, if you keep other credit balances low and make all your payments on time.


  • Short sales and deeds in lieu. FICO, the most popular credit scoring model in the United States, conducted a study of the impact of foreclosures, short sales and deeds in lieu on credit scores. It found that short sales and deeds in lieu affect credit scores as negatively as foreclosures. Since these options also represent a mortgage loan default, any lenders you may wish to do business with in the future could judge a short sale or deed in lieu as equally damaging evidence of your inability to pay your debts. However, some may consider a past short sale more favorably than a foreclosure; it all depends on the lender.


  • Late payments. Late mortgage payments (even one month’s worth) reflect a homeowner’s ability to pay debts. FICO’s study shows that being only 30 days late on your mortgage payment triggers a significant drop in your credit score. You should contact your lender immediately to work out an alternate schedule if you expect to miss a payment.


The impact of a foreclosure, short sale or deed in lieu could be less severe if your current mortgage lender does not report a deficiency balance on your loan to credit reporting agencies. (A deficiency is the difference between your unpaid mortgage balance and the proceeds from a foreclosure, short sale or deed in lieu.) However, it will take time to recover completely from any of these options whether or not a deficiency appears on your credit report.

5 steps to buying a foreclosure

Potential for a great bargain is there, but you have to know what you're getting into.

By Jerold Leslie of TheStreet

With more than 1 million U.S. homes in some phase of foreclosure, great deals abound — if you know how to separate the wheat from the chaff.

"The No. 1 reason to buy a foreclosure is the potential for a good bargain," says Daren Blomquist of RealtyTrac.com, which follows the U.S. foreclosure market. "Distressed properties have always come with a built-in discount, even before today's foreclosure crisis." Bank-owned properties, or homes that lenders have seized through foreclosure and have put up for sale, often sell for even less.

"Foreclosures might not be for every buyer, but we believe they represent a great opportunity for many buyers," Blomquist says. Still, he recommends that would-be buyers tread carefully. Foreclosed homes typically are sold "as is," even though many fell into disrepair as their former owners struggled with money troubles. Some former homeowners also damage their homes on their way out the door. Other properties sit vacant for months or years, attracting vandals or falling further into decay. How can you tell the good from the bad and the ugly? Here are five things that Blomquist says smart foreclosure buyers should always do:

No. 1: Focus on REOs if you're a novice
Inexperienced buyers should probably steer clear of foreclosure auctions and possibly even short sales, focusing instead on real estate owned properties, or REOs, Blomquist says. Short sales can involve lengthy negotiations with lenders for approval, while foreclosure auctions require all-cash payments. You also can't inspect a home that's facing foreclosure auction, because its current residents still own the property and don't have to let you in.

By contrast, REO deals are very similar to traditional home sales. Lenders typically hire real-estate agents to show REO properties to would-be buyers, and also allow home inspections and the use of mortgages to finance purchases. At the same time, REOs generally offer the lowest prices of any distressed properties. Blomquist says that they're often in the poorest condition and that banks frequently discount them heavily to promote a quick sale."A bank isn't emotionally attached to a REO — it's just looking to recoup as much of its losses as possible," he says. "So the lender is often more willing to capitulate on price."

No. 2: Inspect properties carefully
Assuming you follow Tip No. 1, you can have the home professionally inspected. That's key, because most short sales and REOs are sold "as is," even though their financially strapped former homeowners rarely kept up with the maintenance. Blomquist recommends having a good home inspector go over any foreclosure you're thinking about buying. Then present the seller with a list of all problems and estimates of how much they'll cost to fix, using this rundown as a tool to negotiate a lower price.

No. 3: Set up financing in advance
Blomquist says many short sales and REOs attract multiple offers, so you should set up financing in advance."Having your financing in order in advance is crucial," he says. He recommends getting preapproved for a loan before looking at properties. You should also check your credit score, fix any credit problems and set aside enough cash for a down payment.

No. 4: Hire a good buyers agent
"An experienced buyers agent — particularly one who's familiar with foreclosures — can really help you navigate the process," Blomquist says. The National Association of Realtors offers a Short Sales & Foreclosure Resource certification to agents who take a special class on the subject. Similarly, the private Charfen Institute provides class work leading to a Certified Distressed Property Expert designation.

No. 5: Research your market
Study your local foreclosure scene carefully and understand how much properties are selling for, how quickly they're moving and how much a distressed home's value will likely rise. "It's important to not make the mistake of counting on any major price appreciation in the near term," Blomquist says. "We're still in a depressed market, and we're probably not going to see home prices appreciate much for quite some time."