Foreclosure

When a borrower stops paying, foreclosure lets the lender force a sale of the property to recover the debt. For BRRRR investors it works in two directions: it produces discounted houses to buy, and it is the risk on every leveraged rental they own.

Some states require a court case, which can stretch past a year. Others let a trustee sell under a deed of trust without a judge, and that route can finish in a few months. The proceeds pay the foreclosing lender first, then any junior liens in order.

On the ownership side, the risk grows with leverage. A refinance at 75% of value leaves thin cash flow on many deals; the default case here nets about $161 a month after the new payment. A few months of vacancy or a large repair with no reserves is how a rental investor ends up behind on the loan.

Further reading: Foreclosure on Wikipedia.