Many people have either gone through foreclosure, a process that allows a lender to recover the amount owed on a defaulted loan by selling or taking ownership of the property, or know someone who has. RealtyTrac released its U.S. Foreclosure Market Report on April 15 for the first quarter of 2010. The report calculates foreclosure filings, including default notices, scheduled auctions and bank repossessions, and showed that 932,234 properties were involved in the first quarter. That was a 7% increase from the last quarter of 2009 and a 16% increase from the first quarter of 2009. An astonishing one in every 138 U.S. housing units received a foreclosure filing during the quarter. If you or a loved one are facing foreclosure, make sure you understand the process. While it varies from state to state, there are normally six phases of a foreclosure.

Phase 1: Payment default

A payment default occurs when a borrower has missed at least one mortgage payment. The lender will send a missed-payment notice indicating that it has not yet received that month’s payment. Typically, mortgage payments are due on the first day of each month, and many lenders offer a grace period until the 15th. After that, the lender may charge a late-payment fee and send the missed payment notice. After two payments are missed, the lender may send a “demand letter.” This is more serious than a missed-payment notice; however, at this point the lender is probably still willing to work with the borrower to make arrangements for catching up on payments. The borrower would normally have to remit the late payments within 30 days of receiving the letter.

Phase 2: Notice of default (NOD)
A notice of default is sent after 90 days of missed payments. In some states, the notice is placed prominently on the home. At this point, the loan will be handed over to the lender’s foreclosure department in the same county where the property is located. The borrower is informed that the notice will be recorded. The lender will typically give the borrower another 90 days to settle the payments and reinstate the loan. This is referred to as the reinstatement period.

Phase 3: Notice of trustee’s sale
If the loan has not been brought up-to-date within the 90 days after the notice of default, a notice of trustee’s sale will be recorded in the county where the property is located. The lender must also publish a notice in the local newspaper for three weeks indicating that the property will be available at public auction. All owners’ names will be printed in the notice and in the newspaper, along with a legal description of the property, the property address and when and where the sale will take place.

Phase 4: Trustee’s sale
The property is placed for public auction and will be awarded to the highest bidder who meets all of the necessary requirements. The lender, or firm representing the lender, will calculate an opening bid based on the value of the outstanding loan, any liens and unpaid taxes, and any costs associated with the sale. Once the highest bidder has been confirmed and the trustee’s sale is completed, a “trustee’s deed upon sale” will be provided to the winning bidder. The property is then owned by the purchaser, who is entitled to immediate possession.

Phase 5: Real-estate owned (REO)

If the property is not sold during the public auction, the lender will become the owner and will attempt to sell the property on its own, through a broker or with the assistance of an REO asset manager. These properties are often referred to as “bank-owned.” The lender may remove some of the liens and other expenses in an attempt to make the property more attractive.

Phase 6: Eviction
The borrower can often stay in the home until it has been sold either through a public auction or later as an REO property. At this point, an eviction notice is sent demanding that any people vacate the premises immediately. Several days may be provided to allow the occupants sufficient time to remove any personal belongings, and then typically the local sheriff will visit the property and remove the people and any remaining belongings. Belongings may be placed in storage and retrieved later for a fee.

The bottom line
Throughout the foreclosure process, many lenders will attempt to make arrangements for the borrower to get caught up on the loan and avoid a foreclosure. The obvious problem is that when a borrower cannot meet one payment, it becomes increasingly difficult to catch up on multiple payments. If there is a chance that you can catch up on payments — for instance, you just started a new job after a period of unemployment — it is worth speaking with your lender. If a foreclosure is unavoidable, knowing what to expect throughout the process can help prepare you.

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Know your options. Since not all investment properties are the same, it’s important to determine what type of property fits your strategy. Do you want to become a landlord, or would you rather restore and resell properties? Are you interested in apartment buildings and other commercial real estate, or in buying land that can be developed? First-time real-estate investors may want to start with residential housing, since commercial real estate and land development still face challenging market conditions.

Partner with experience. First-time investors should find a real-estate agent experienced in investment property deals who can help you locate promising properties. Look for relational brokers who expect to do business with you again and therefore are going to be much more careful with what they recommend. A second option is to collaborate with a more experienced real-estate investor and close a deal together. In this economy, an experienced real-estate investor may be willing to work with you in exchange for the capital you can provide, giving you the opportunity to glean investment knowledge and experience firsthand. Even if you don’t collaborate with other real-estate investors, talk to them about pitfalls they’ve experienced. Go down to the general district court in your area and listen to some landlord/tenant cases so you can get a sense of what kind of challenges landlords face.

Look for the right location. If you buy a property with hopes of renting it out, location is key. Homes in high-rent or highly populated areas are ideal; stay away from rural areas where there are fewer people and a small pool of potential renters. Also, look for homes with multiple bedrooms and bathrooms in neighborhoods that have a low crime rate. Renters gravitate to a safe neighborhood, and if they have kids, they will want a good school district. Also think about potential selling points for your property. If it’s near public transportation, shopping malls or other amenities, it will attract renters, as well as potential buyers if you decide to sell later. The more you have to offer, the more likely you are to please potential renters.

Have capital lined up. Speak to potential lenders or even a financial planner about whether you have enough assets to handle the ups and downs that could come with investing. Even if you plan to rent out the property, count on paying the mortgage whenever there’s a vacancy. If you can have about six months of mortgage payments saved up, it’s there if you need it, and you can use that money for repairs. Even if you’re planning to fix up a home and sell it, you may end up holding onto it for several months in the current market.

Build a supporting cast. Don’t wait until a rental property needs repairs to find someone to handle them. Line up maintenance individuals who can take care of the different challenges that occur so you can simply call the person when a particular issue comes up. Other sources you may want to have relationships with are an attorney to consult with on tenant issues, a property management firm to handle the day-to-day rental affairs and an accountant to help you understand the tax ramifications of investing. The more support you have, the better you will be able to handle the problems that come your way. Whatever you do, understand that buying investment property is an entirely different experience than buying your primary residence. When you go to buy your own home, you usually have emotions in it. When you go to buy an investment property, you need to put all that aside and ask, ‘What makes sense?’

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Arm’s Length Purchase: The term is used to describe a real estate transaction in which the buyers and sellers of property or a parcel of land act independently, and are not related to each other. The idea of an arm’s length transaction ensures the buyers and sellers in the real estate transaction are acting in their own self interest and are not subject to any outside influence. In a ‘non-arm’s length tansaction their could be other factors that influence the transaction and subsequently the value of the exchange. This concept is important as it is a common way to determine if the price is a proxy for fair market value. If the transaction is not an ‘arm’s length’ transaction, then the stated price will likely differ from the actual fair market value of the property.

Joint Tenancy:  An equal undivided ownership interest of a property by two or more natural persons each of whom has the right, called the right of survivorship, upon the death of one joint tenant to the automatic succession of the title of the deceased tenant.  An estate owned by two or more parties in equal shares that is created by a single transfer document. Upon the death of a joint tenant the surviving joint tenants take the entire decedent’s share of the property, so nothing passes to the heirs of the deceased.

Natural Person:  A living person as distinguished from a legal person such as an organization or a corporation.

Acceleration Clause:   A condition in a real estate financing instrument giving the lender the power to declare all sums owed to the lender immediately due and payable upon the happening of an event such as sale of the property or a delinquency in the repayment of the note.  Clause in a deed of trust or mortgage which “accelerates” the time when the indebtedness becomes due. For example, some mortgages or deeds of trust contain a provision that the note balance shall become due immediately upon the resale of the land or upon the default in the payment of principal and interest.