We all get by now that plenty of opportunities arise by locating distressed and motivated sellers who are willing to make a deal for their property. However, distressed lenders can also be a great source of opportunity when searching for undervalued properties. Lenders fall in distress when borrowers fail to make payments on their mortgage.

When a borrower is in default, not only is the borrower in distress but so is the lender as the loan is no longer a performing asset. A borrower is considered to be in default when the terms of the loan are not or no longer being satisfied, such as making payments. In order to capitalize on lender distressed opportunities, you need to know the 4 phases of the foreclosure process first.

1. Preforeclosure opportunity

The pre-foreclosure phase basically means that the borrower is in default long enough for the lender to initiate the beginning stages of the foreclosure process, but the action has not yet been completed. Most homeowners will make every effort to hang on to their houses for as long as possible. The lender just wants to receive payments on the loan to make it a performing asset, meanwhile, the borrower wants to make the payments to keep the house. Situations like these mean opportunity for the real estate investor by negotiating on behalf of the homeowners. Although you will not be bailing out the homeowners, you are there to step in and offer them a way out for them to minimize the damage on their credit meanwhile you continue to make the payments to the lender.

2.Foreclosure and sheriff sales

After the pre-foreclosure phase has expired, the process moves to what is often called a Sherriff sale, this is when the second opportunity comes because the house will be put up to sell at an auction at the county courthouse to the highest bidder, which is often the bank at the time. This is a great way to score an undervalued property because oftentimes you have little competition going after the same deal. Be careful with auction sales to check for any liens that may be attached to the house by pulling the chain of title closest to the day of the auction. This is key due diligence that must be done prior to any auction sale.

3.Redemption period

After the title has transferred to new ownership the process moves to what is called the “redemption period” which is a certain period of time given to the defaulted borrower and previous owners of the house to satisfy all dues owed to the lender to get the house back. These are state exclusive key rights (retention rights) given to the defaulted borrows. Not all states have this redemption period and for the ones that do, the timeframe can vary from a few days to up to one year.

Sometimes the defaulted borrowers remain in the house rent-free during this last period of time that they technically have to “squat” or freeload by not paying rent. A creative way to score a deal during this phase is to go after the “retention rights”, which is the key objective. There are many strategies that you can take to get the defaulted borrower to assign you these rights but the main goal is to get them. Not all investors are aware that redemption rights can be assigned, much like a lease with an option, so the competition is minimal.

Often times the amount owed to the lender to get the house back is already determined so one can figure out if they want to move forward, to begin with. You can offer the defaulted borrows money for them to move out in exchange for them to assign their redemption rights to you. At this point, the defaulted borrow has already taken the full damage caused by the foreclosure as far as credit and more than likely they don’t plan on exercising their redemption rights if the house went into foreclose, to begin with so offering any money in exchange for their redemption rights will be similar to free money for them.

This is just one way to approach the objective which is to obtain the retention rights transferred to you. Always be sure that even after getting retention rights that you have a plan set for afterward such as obtaining the money to pay the lender to obtain ownership if it even makes sense to do so for a good investment.

4.Post foreclosure market and lender REO’s

The fourth and final stage of the foreclosure process is the post-foreclosure phase, which is when all ownership rights are transferred to the lender and the defaulted borrower no longer owns any rights or claims to the property. When this occurs, the property becomes a non-performing asset to the lender, commonly called real estate owned (REO) to the bank and they almost always choose to sell it.

One main advantage of scoring a deal from an REO is that you don’t have to worry about any encumbrances on the title because more than likely the lender has to clean any of that up before putting the house up for sale so the risk of any liens on the title is almost always slim to none.

Another advantage is that you have the opportunity depending on the deal to purchase the property at a good price. Normally the starting price is close to what the lender has to get in order to at least break even on the loan or investment it made initially with the defaulted borrower.

Remember that the lender is hurting because they already took the loss when the original borrower defaulted and now their asset is now a liability. At this point, they likely want to get rid of the property. Remember that banks are not in the business of managing the property, they are in the business of lending money. Leverage this fact with your negotiations and get the best deal possible during this foreclosure phase.

These are the four phases in which an investor can purchase an undervalued property from distressed lenders. Always remember to leverage the distressed lender’s main key pain point to want to get rid of the property to your advantage. Regardless of what stage of the foreclosure process you decide to search for deals in, remember to never fall in love with your investment and stick with the numbers from your analysis. It’s better to walk away from a deal than to get stuck with a property that does not satisfy your rate of return or worse, turn into a liability. After all, the purpose of all of this information is to avoid that altogether.