HOW THE FORECLOSURE PROCESS WORKS. The start of a foreclosure occurs when a borrower fails to make their monthly mortgage payments for one or two months. After 45 days or so, if the borrower doesn't respond to the lender's polite default letters, most lenders begin the foreclosure process.

Although some borrowers stall their home loan lenders, most realize failure to reinstate the loan can be a costly mistake. Here are the three basic foreclosure steps, and the bargain-buying opportunities:

1. LENDER RECORDS A LIS PENDENS LAWSUIT OR NOTICE OF DEFAULT. The official foreclosure process begins when a home loan lender records either a lis pendens lawsuit (which means litigation is pending) or a notice a default.

The lis pendens lawsuit is used if a mortgage is involved, whereas a notice of default is recorded when the lender's security instrument is a deed of trust. The lis pendens lawsuit often results in a judicial sale of the property. But a notice of default can result in a nonjudicial trustee's sale.

However, the borrower usually has three to six months to cure their loan default and reinstate it before the property goes to a foreclosure auction. Texas has the shortest reinstatement period, which can be as fast as 21 days. In California, it's usually 90 days.

This reinstatement period creates the first opportunity for a home buyer or an investor to contact the defaulting owner to see if the property can be purchased, often at a bargain price for a quick sale. Some defaulting homeowners are willing to sell for just a few thousand dollars of their equity so they can "move on" with their lives.

Because time is of the essence, foreclosure buyers during this reinstatement period usually purchase "subject to" all existing liens, such as a second mortgage, mechanics' lien, property tax lien, judgment lien, and IRS income tax lien. A purchase during this "pre-foreclosure period" enables the buyer to obtain title insurance so there are no title surprises.

2. PROS AND CONS OF BUYING AT THE FORECLOSURE AUCTION. Frequently, a property is "over-encumbered" with total mortgages and liens that exceed the property's market value. In that situation, it doesn't pay to buy during the pre-foreclosure reinstatement period because the defaulting borrower has little or no equity.

In that situation, if the borrower doesn't cure his/her default, the best time to buy may be at the foreclosure auction. The big advantage is most junior liens recorded after the obligation that is being foreclosed are wiped out by the judicial or nonjudicial foreclosure sale.

However, unpaid property taxes and IRS income tax liens are not wiped out.

Disadvantages of buying at the foreclosure auction include (a) no opportunity to inspect the property interior, (b) competition from other bidders, and (c) cash (or cashier's checks) are required. Sorry, your Visa, MasterCard or American Express card are not welcome.

3. BUY AFTER THE AUCTION FROM THE FORECLOSING LENDER. As frequently happens, no bidders show up at the foreclosure sale. The title then goes to the foreclosing lender.

Institutional lenders then call it REO (real estate owned) property, which they usually want to unload quickly, sometimes at a bargain price to mitigate the lender's loss.

A written offer, along with an 'earnest deposit' may be made to the lender to buy the foreclosed property.  The foreclosing lender may accept your purchase offer, counteroffer, or reject it. But some lenders insist on marking the foreclosure up to full market value and listing it for sale with a local real estate broker, thus incurring a sales commission.

HOW TO FIND FORECLOSURE LISTINGS. In many cities and counties, there are local legal and private subscription newspaper lists of foreclosures. Many of these lists are now available on the Internet.  (Let me add here that these lists are not necessarily always up-to-date.  If you're not up to doing the research, correspondence and legwork yourself, you may enlist the services of a real estate agent, in which case you may be responsible for paying all or part of the real estate commission.  For further information, please contact me directly.)

Information and partial article reprinted from Bob Bruss' Notebook