When individuals or businesses are not able to make full payment on a real estate property (over 90% of properties are obtained with loans), they may pledge that property to the lender as a security for the loan. In case the debtor (mortgagor) defaults, the lender will usually seek to secure their interests on the real estate through legal foreclosure. Foreclosure is the lendor forcing eviction and termination of the mortgage in compliance with local and state laws (this is important as foreclosure rules are different in every state).  The person in forclosure is given notice and then in a few months (depending on local laws) the property is offered for sale to the highest bidder on the court house steps. 

Most of the time the homes are offered for the amount of the original or primary loan on the mortgage.  Most of the time, lately, most people owe more on their homes then they are worth so most of these homes just end up going back to the bank as bank owned (BO).  At any time during this process the current owner being foreclosed on is entitled to buy the house outright for cash or by virtue of obtaining another loan or financing (in many states the person being foreclosed on can have up to 1 year after the foreclosure to buy the house back - this is why it is so important to know the local foreclosure rules and laws.  Foreclosure procedure is simple. As soon as the borrower defaults on payments, lender will have a notice (Notice of Default) issued against borrower to let him know that he/she maybe facing a foreclosure of the property if the loan is not reinstated. Borrower is provided with some time, known as grace period.

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Owners can sell the property themselves during this grace period or they can arrange for funds to reimburse the debt. Real estate investors are often in hunt of properties in this pre-foreclosure phase, knowing that the owner is out of time and options and he/she will be looking to sell the property as soon as possible. Normally they will sell the property at a very reasonable price (usually called a short sale) which is still more than what they will get if the property is sold by lender through auction. Another advantage of selling the property during this grace period is that the owner can avoid having a foreclosure in his/her credit history.

If the owner was not able to repay the default amount during the grace period, a public auction will take place. When you are going to bid on any property in foreclosure, you must do some basic research work. After determining the property's market price and making sure the title is clean (you must always do a complete and thorough title search every time), carefully decide on what should be your limit to bid. Getting the help of some professional agent or real estate investors that are more experienced in foreclosures can definitely help if you are going into property auctions for the very first time.

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Although foreclosures provide investors with some opportunities to make profit, they are almost never welcomed by owners or even lenders. As an owner you should try to use any alternative other than foreclosure to save your credit history from getting negative ratings. Always keep in touch with your lender or lenders if you are going through some financial crisis and let them know that you expect it to be over soon and that you will make your payments. Normally lenders are also not wwanting to go through foreclosure as it looks bad on their books and will cost them money; ideally both parties should sit together, evaluate the situation, weigh up different options and make some arrangements to relieve both parties.