The Foreclosure Process
Let’s define Foreclosure
In the simplest terms, a foreclosure will occur when a homeowner is unable to make the principal and/or interest payments on the loan. This will ultimately result in the property being seized and sold.
The foreclosure allows the lender to recover the loan amount owed either selling or re-taking ownership of the property that was securing the loan. This is the process we have come to know and love as the repossession process. It all starts when a homeowner defaults on loan payments. The lender files a public default notice know as a Notice of Default or Lis Pendens.
In most cases the lender will take ownership of the property. The intent is usually to re-sell the property and recover the loan amount and associated cost. The lender can do a short sale foreclosure which is an agreement that is made with the homeowner in a pre-foreclosure process. The lender can also buy back the property at the public auction. When a lender repossesses a property the term used is bank-owned or REO (Real Estate Owned).
Stages of Foreclosure
Pre-Foreclosure
A pre-foreclosure is when a homeowner sells the property before a default and official foreclosure is started. The homeowner could walk away with something instead of losing everything and destroying their credit.
Notice of Default
A Notice of Default (NOD) is when a lender puts the homeowner on official notice that he/she is facing foreclosure. This will usually occur after three to six mortgage payments are missed. The Notice of Default is recorded at the County Recorder’s Office.
Notice of Sale
If the loan is not brought current within three months, an official sale date is determined. A notice called a Notice of Sale will be posted on the property. Neighbor’s love seeing official notices being posted on your house and will patiently wait for you to leave on an errand so they can read the notice. This Notice of Sale will also be recorded at the County Recorder’s Office. To add real insult to injury, this Notice of Sale will also be published in the local newspapers for a three-week period.
Foreclosure Trustee Sale
The Notice of Sale would have stipulated the time and location of the actual sale. The sale will usually be on the steps of the county courthouse. The property is auctioned to the highest bidder. The successful bidder must pay in cash. Now few people carry around hundreds of thousands of dollars in a briefcase. Usually a deposit is placed and the remainder of the money must be paid within 24 hours. Upon complete payment, the winner will receive a trustee’s deed to the property.
Foreclosure Auction
At auction, the foreclosing lender sets an opening bid on the property.
The opening bid is usually equal to the amount owed on the property; interest accrued on the loan, additional fees and any attorney fees incurred. To throw cold water on any potential real estate investors that hope to be the only bidder, the opening bid is considered as an opening only. If there are no bids higher than the opening bid, the property is normally purchased by the lender.
It makes little sense that after calculating all the cost that the lender would not accept THAT amount for the property. I have a thought about this and I believe the lender doesn’t want a bidder to get a really great deal on a property. The lender took all the risk, went to all the trouble getting the home back and selling it and some investor walks in and gets a deal by shaving $100,000.00 of the purchase price. Better to wait for the market to rebound and take the profit.
If the opening bid is not met the sale property is considered a Real Estate Owned property or REO. Consider that if the opening bid is the total amount owed or incurred and the lender sells for less the bank absorbs the losses.
The good news for investors is that with REO properties all liens are wiped out. The only amounts still owed would be any existing property taxes. A clear title is a nice reward.
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