In the superheated San Francisco Bay Area property market, foreclosed properties are available at as much as 40% below market value, writes Srini Saripalli.The last few months of a calendar year are considered sluggish for transacting real estate, but Silicon Valley seems to be an exception to this. Properties are appreciating rapidly at this time of the year and this year has been one of the best years for selling real estate.

Understanding the marketplace and rationalizing the escalating prices has become difficult for investors and homebuyers . At a time when real estate prices are soaring there are still many opportunities to buy properties that are 30 percent to 40 percent below market value. Foreclosures are one of the best ways to find great bargains.

So what is a foreclosure?

A foreclosure is a legal process that a lender initiates after the borrower fails to repay the loan as per the terms of the contract. The lender initiates the foreclosure process to reclaim the possession and ownership of the property. For example, let's say a borrower has a mortgage of $1 million on his property that is worth $1.5 million. Let's assume monthly payments on a $1million mortgage are about $9,000. If the borrower misses three consecutive monthly payments, then at the end of the 90th day or third month the lender will file a "Notice of Default" at the county recorder's office. This is the notice that indicates pending foreclosure proceedings. It also indicates the auction date. At this time the borrower will have the following options:

Pay off all the back payments, penalties and legal fees if any and make the loan current

As the borrower in the example has equity of $500,000 he can convert a part of that to cash by re-financing the property. Re-financing a property in foreclosure is usually difficult.

Sell the property and payoff the mortgage, provided the proceeds from the sale equal or higher than the mortgage amount.

The opportunity to buy a pre-foreclosure property opens the day the "Notice of Default" is filed. The opportunity ends on the day the property is sold at the auction. The time between these two events enables a buyer to work with the homeowner and the lender to negotiate and structure a deal that could be extremely profitable. This is the only time in the entire foreclosure process where the buyer can use conventional mortgage, hard moneylenders or creative financing techniques to buy the property.

Once a "Notice of Default" is filed it becomes public information, and usually there is a lot of competition from other investors due to this filing. Hence to avoid competition experienced investors use various farming techniques to spot owners before the "Notice of Default" is filed. Properties can also be bought in auctions at bargain prices too, but one would need cash for the purchase. Bidding in an auction sale is extremely risky and one needs lot of experience and skill.

What is the motivation of the seller?

Once a borrower defaults on a loan his credit is at serious risk. A foreclosure stays on the credit report for a minimum of seven years. This is the prime reason why people who have defaulted their payments are extremely motivated to avoid a foreclosure proceeding.

Borrowers in foreclosure are sometimes difficult to deal with, as they are confused and scared. Their self-esteem is low and they are in need of support from someone who understands the process. As a buyer your motive should always be to help them in their tough times. If any time during the transaction a seller perceives that you are taking advantage of his or her situation, he/she always walk away from the deal.

Srini Saripalli is a real estate investor and business development consultant to Fortune 500 companies. He lives in San Jose, Calif. Srini can be reached at: www.srinisaripalli.com