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A foreclosure is a legal proceeding in which a bank or lender repossesses a parcel of real estate due to the owner's failure to comply with an agreement between the lender and borrower, called a mortgage or deed of trust. Lenders usually consider a mortgage to be in default when payments have not been made for several months. Now despite being a dreaded word in the real estate world, a foreclosure can actually be extremely beneficial for investors. Now that you have an idea of what a foreclosure actually is, lets me explain the different types: the pre-foreclosure, foreclosure auction, and REO or real estate owned foreclosure.
 A pre-foreclosure is the period between the mortgage lender's notice to the borrower of their default on the mortgage payments and the auction sale event that finalizes the transfer of title to the property to the lender. This period of time allows the current homeowner in default to sell his/her home and use the net sale proceeds to satisfy the mortgage debt even though these proceeds could be less than the amount owed. Although the homeowner will probably end up losing money on this type of sale, it is a much better alternative than having the property go into foreclosure. Now the great thing about buying a house during the pre-foreclosure process is that it allows you to simply take over the existing financing. You don't need to have perfect credit or qualify for a loan, unlike most of the other opportunities in the industry that often preclude most people from getting involved in real estate investing.
If the homeowner is unable to sell the property it will go into the next stage known as the foreclosure auction. This is when the bank/lender pays any other outstanding debts such as property taxes or amounts owed to the IRS in order to sell the house with a clear title. Buying property from a foreclosure auction is an experience unlike any other in purchasing real estate. When a property goes to auction, the competition can sometimes be intimidating. In addition, you have to be ready to make a substantial payment immediately, and therefore have to have your short-term financing squared away. Don't let this discourage you however, because purchasing real estate this way can ultimately be very lucrative.
The third and final type of foreclosure is the real estate owned (REO) foreclosure. An REO is different from a foreclosure property in the sense that the bank has already tried to sell the property at a foreclosure auction and has not been successful in getting bids. As a result, the bank has become the owner of the property because the property did not fetch a high enough price at the foreclosure auction. As expected, the bank is not too interested in keeping the REO for much longer, so this becomes the perfect opportunity to invest in real estate and potentially get an amazing deal.
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