A specific legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments to the lender by forcing the sale of the asset used as the collateral for the loan. Formally, a mortgage lender (mortgagee), or other lien holder, obtains a termination of a mortgage borrower (mortgagor)’s equitable right of redemption, either by court order or by operation of law (after following a specific statutory procedure).

The foreclosure process as applied to residential mortgage loans is a bank or other secured creditor selling or repossessing a parcel of real property (immovable property) after the owner has failed to comply with an agreement between the lender and borrower called a "mortgage” or “deed of trust". Commonly, the violation of the mortgage is a default in payment of a promissory note, secured by a lien on the property. When the process is complete, the lender can sell the property and keep the proceeds to pay off its mortgage and any legal costs, and it is typically said that "the lender has foreclosed its mortgage or lien." If the promissory note was made with a recourse clause then if the sale does not bring enough to pay the existing balance of principal and fees the mortgagee can file a claim for a deficiency judgment. In many states in the United States, items included to calculate the amount of a deficiency judgment include: the loan principal, accrued interest and attorney fees less the amount the lender bid at the foreclosure sale.


Real Estate Owned (REO):

A class of property owned by a lender—typically a bank, government agency, or government loan insurer—after an unsuccessful sale at a foreclosure auction.  A foreclosing beneficiary will typically set the opening bid at a foreclosure auction for at least the outstanding loan amount. If there are no bidders that are interested, then the beneficiary will legally repossess the property. This is commonly the case when the amount owed on the home is higher than the current market value of this foreclosure property, such as with a high loan-to-value mortgage following a real estate bubble. As soon as the beneficiary repossesses the property it is listed on their books as REO and categorized as an asset (non-performing asset).


Housing and Urban Development (HUD):

 A Cabinet department in the Executive Branch of the US federal Government founded in 1965 to develop and execute policies on housing and metropolises.  HUD’s mission is to create strong, sustainable, inclusive communities and quality affordable homes for all.  HUD is working to strengthen the housing market, to bolster the economy and protect consumers; meet the need for quality affordable rental homes, build inclusive and sustainable communities free from discrimination; and transform the way HUD does business.  An office within HUD is responsible for regulation of Fannie Mae and Freddie Mac.


Short Sale:

 A sale of real estate in which the proceeds from selling the property will fall short of the balance of debts secured by liens against the property and the property owner cannot afford to repay the liens' full amounts, whereby the lien holders agree to release their lien on the real estate and accept less than the amount owed on the debt. Any unpaid balance owed to the creditors is known as a deficiency.  Short sale agreements do not necessarily release borrowers from their obligations to repay any deficiencies of the loans, unless specifically agreed to between the parties.  A short sale is often used as an alternative to foreclosure because it mitigates additional fees and costs to both the creditor and borrower. Both often result in a negative credit report against the property owner.


 Buying real estate at an auction is one way to save thousands of dollars on any type of property, from undeveloped land to a luxury estate. Real estate auctions save the buyer time and expenses in terms of marketing and maintenance. For buyers, the competitive spirit of an auction can make the process intimidating, but knowing what to expect can help you bid with confidence.


1031 Exchange Under Section 1031 of the United States Internal Revenue code:

The exchange of certain types of property may defer the recognition of capital gains or losses due upon sale, and hence defer any capital gains taxes otherwise due. Real properties generally are of like kind, regardless of whether the properties are improved or unimproved.  If liabilities assumed by the buyer exceed those of the seller (taxpayer), the realized gain of the seller will be not only be realized, but recognized as well. If however, the seller assumes a greater liability than the buyer, the realized loss cannot offset any realized and recognized gain of receiving boot such as cash or other personal property considered boot.


Real Estate Tax Lien:

 A tax lien is a lien imposed by law upon a property to secure the payment of taxes. A tax lien may be imposed for delinquent taxes owed on real property or personal property, or as a result of failure to pay income taxes or other taxes.

Many states and counties rely on property tax to operate municipal services. When property owners fail to pay taxes or are delinquent, the government still needs the money to cover the ongoing government expenses. Many states sell tax liens. This allows an investor to pay the back due taxes, thus putting money back into the government coffers. In exchange for the payment, the property owner will be liable to repay the investor, plus interest and fees. The property owner has a specific time frame to repay the investor, and if they fail to do so, the investor can take steps to foreclose on the property and obtain clear title.


Home Owners Association (HOA) Lien:

 If the homeowner's association (HOA) has written, recorded covenants and/or bylaws that require the payment of dues, liens can be filed for non-payment of those dues. The laws regarding HOA liens vary widely from state to state.  If you are obligated to pay your assessments, the association cannot only file a lien to collect the debt you owe, it may be able to sell your unit to satisfy the debt. HOA liens are given special priority under Colorado law, which has significant implications in the foreclosure process. An HOA lien is senior to all other liens except a first deed of trust and the county's lien for property taxes. A portion of an HOA lien “equivalent” to six months' worth of dues is senior to a first deed of trust. This portion is often referred to as the “priority portion.” The priority portion of the lien need not actually represent monthly dues. For example, if an owner is current on monthly dues of $100 but fails to pay a special assessment of $600, the priority portion of the lien is still $600 (the equivalent of six months' worth of dues).


Internal Revenue Service (IRS) Lien:

 The Internal Revenue Service routinely files Federal Tax Liens against taxpayers who have unpaid tax obligations. A federal tax lien is a document filed with a county government (usually where the taxpayer lives or conducts business) notifying the general public that a taxpayer has an unpaid federal tax debt. Liens attach to the taxpayer's property (both real property and personal property). If property is sold while a lien is in effect, the IRS will be paid out of the sales proceeds before the taxpayer is paid.

Once a lien is filed, it becomes a matter of public record. Liens record the full amount owed to the IRS at the time the lien is filed. This information is routinely picked up by the various credit reporting bureaus, and so federal tax liens will eventually show up on your credit report.


Net Operating Income (NOI):

The sum of all positive cash flows from rents and other sources of ordinary income generated by a property, minus the sum of ongoing expenses, such as maintenance, utilities, fees, taxes, and other items of that nature (debt service is not factored in to the NOI).  The ratio of NOI to the asset purchase price, expressed as a percentage, is call the capitalization rate, or CAP rate, and is a common measure of the performance of an investment property.


Capitalization Rate:

The ratio between the net operating income produced by an asset and its capital cost (the original price paid to buy the asset) or alternatively its current market value. The rate is calculated in a simple fashion as follows:

Capital Cost (asset price) = Net Operating Income/ Capitalization Rate


Capital Appreciation:

 The increase in market value of the asset over time, realized as a cash flow when the property is sold.  Capital appreciation can be very unpredictable unless it is part of a development and improvement strategy.  Purchase of a property for which the majority of the projected cash flows are expected from capital appreciations (prices going up) rather than other sources is considered speculation rather than investment.


Tax Shelter Offsets:

Occur in one of three ways:  deprecation (which may sometimes be accelerated), tax credit, and carryover losses, which reduce tax liability charged against income from other sources.  Some tax shelter benefits can be transferable, depending on the laws governing tax liability in the jurisdiction where the property is located.  These can be sold to others for a cash return or other benefit.