If there is one thing that all home buyers want, it’s to buy a house with a good deal attached. The first place that they think about when it comes to a cheap deal on a new home is foreclosure properties.
What Is Foreclosure?
Foreclosure is the legal procedure by which an owner forfeits their rights to a property. It’s usually the result of when the original homeowner cannot pay the mortgage. If the homeowner then cannot pay the outstanding debt later or sell the property quickly, the next step in the process is a foreclosure auction. This is the general foreclosure definition, but it’s much more complicated than that.
A foreclosure no longer belongs to the buyer who purchased it initially; it now belongs to the bank. Homeowners who have abandoned the home or deeded the house to the bank will be putting their home into foreclosure.
Most of the time, buyers believe banks want to dispense of these dilapidated homes quickly to get some cash for them. That’s not entirely the case – neither is the vision that these foreclosure properties are cute little houses that are owned by those who found themselves in dire straits and couldn’t keep up with the payments. Some are very run down and require a lot of work to bring them back up to code.
The other common misconception is that the bank has ‘taken back’ the property, but the bank never owned the property in the first place, which means that they cannot ‘take back’ something that they never owned. The significant difference to note is that the bank has foreclosed on a mortgage or trust deed, and they then seized the property.
Reasons Foreclosure Happens
There are a lot of reasons that sellers cease making payments on their homes. Very few people choose to take the route of foreclosure voluntarily, as it’s often something that cannot be predicted. Here are some of the main reasons that foreclosure happens:
- Loss of job – if a homeowner cannot find another job before mortgage payments are due, they may not have much of a choice about their home being foreclosed.
- Unexpected medical conditions – some conditions result in an inability to work and perform certain jobs, resulting in foreclosure when mortgage obligations cannot be met.
- Excessive debt – when drowning in debt, moving toward bankruptcy is often the case, and a bank will foreclose on a house in these circumstances to pay off the debts.
- Divorce – when a couple split up, disputes over the ownership of a property can lead to a foreclosure being the option, mainly if there are financial issues.
- Moving to another state with a job transfer.
- Maintenance – this can be unaffordable for homeowners on a large property that needs a lot of work.
There have been times in history where people have walked away from their homes since the values have fallen and they owed more to the bank than their homes were worth in the first place. It isn’t the ideal solution, but it’s one that can relieve a financial burden in times of economic crisis, mainly when that crisis is one that affects the economy country-wide.
The Foreclosure Process
The specifics of a foreclosure vary according to state law, but the gist is still the same. We’ve broken it down into five stages.
Stage 1: Payments Are Missed
The foreclosure process doesn’t start with the bank taking over the home; it begins when the borrower (homeowner) fails to pay their mortgage as part of their agreement. Most of the time, payment failures occur for all the reasons listed earlier; divorce, job loss, death, etc.
Being in this situation is tough, but it’s imperative that a borrower speaks to their lender as soon as possible as there are always ways to stay in the home. The whole process of foreclosure does cost the lender a lot of cash, and they’re in the same position as the borrower – they want to avoid it as much as possible.
There are occasions where a borrower could stop paying the mortgage intentionally, particularly if the mortgage on the property exceeds the value of the house as a whole. No matter the reason, it happens when the borrower cannot or will not meet the payments agreed.
Stage 2: Public Notice
A lender will record a public notice with the County Recorder’s Office between three and six months of missed payments. This is to show that the borrower has defaulted repeatedly. The lender may well be required to post this notice – the Notice of Default – on the front door of the property, which is designed to make a borrower aware that they are in danger of losing their property. It’s a notice to say that they are at risk of foreclosure.
Stage 3: Pre-Foreclosure
Borrowers enter a grace period that is also known as pre-foreclosure, which happens after the Notice of Default. This grace period can last up to 120 days, and in this time the borrower can work closely with the lender via a short sale or choose to pay the outstanding amount owed.
During this period, the borrower can end up keeping their home, avoiding foreclosure. If the default remains, the foreclosure continues.
Stage 4: Auction
Once the grace period deadline has passed, the lender sets a date for the home to go for sale at a foreclosure auction. This is also known as a Trustee Sale. This is recorded with the County Recorder’s Office, and the notification is delivered to the borrower as well as being posted to the property door and printed in the public newspaper. There are many places that an auction can be held, including the steps of the courthouse, at a convention center, and even in the property itself.
The good news for a borrower is that despite the house going for auction, they can come up with the money to pay the debt and stop the process right up to the moment the home is auctioned. Auctions work so that the house is sold to the highest bidder for cash, but sometimes it happens that the bank buys the property at auction themselves.
Stage 5: Post-Foreclosure
There is the chance that the lender can take ownership of the property if a third party doesn’t buy at auction, and this is known as Real Estate Owned (REO). A local real estate agent then lists these properties for sale on an open market, or they are sold via the bank at a liquidation auction.
Negotiating With Sellers
There are investors out there who have a niche within buying foreclosure properties, and they often prefer to purchase their home before the proceedings are finalized. There are a few things to consider including:
- The proceedings for foreclosure vary by state, and there is a chance that the borrower can stay in the property for almost a year, mainly where mortgages are used. Where trust deeds are used, the seller has four months before sale.
- Every state has a period of redemption, and you should consult a real estate lawyer to get some more information.
- Buyers must give sellers certain disclosures when it comes to equity purchases in some states, and failure to provide these can end in fines and lawsuits.
Buying A Home: Trustee’s Sale
There are common denominators with a home sale, including sealed bids, proof of finances, no loan contingency, purchasing the property as is and lastly, you may not be able to see the inside of the property before you make an offer. The last point can be a risk because you don’t know the worth of the property if you don’t look.
There is also an excellent chance that you may need to evict the tenant from the property, which can prove costly to you. Paying for a title search could avoid the issue of liens recorded against the property, which would eventually become your problem after transfer.
Buying A Home: From The Bank
Most banks do not sell homes to investors directly, and if the bank is willing to sell a home individually, they will list it with a real estate agent to do so. Some REO agents specialize in these foreclosure listings. You can buy directly from the bank during a bulk sale purchase, which is where the bank would package properties into one transaction and sell them all at once to one person. This would usually be the preferred way to buy a foreclosure.
Foreclosure isn’t a procedure that is fun to handle, and while there are multiple chances for a borrower to keep their home, their circumstances will depend on their ability to pay the debt down. If you want to invest in a foreclosure, it’s important to do your research on costs before you jump in with both feet. Get yourself educated about the process, and you can purchase a foreclosure with your eyes open. Look out for auction listings, and choose your path from there.
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