The Foreclosure Process
As we watch the real estate market over the past years we see good years and slow years and we see fincing changes and economic changes. With some of these changes opportunities arise with respect to foreclosures.
The real estate foreclosure process is very important to understand as it can mean huge profits for the savvy investor. The first step is to learn the process as it works in your state. Most states have similar processes and, therefore, the following explanation will be general enough to give you a working knowledge to start participating in this lucrative market.
There are many ways real estate properties can be foreclosed on (ie. Mortgage Lien and Trust Deed: judicial/Power of Sale; Mortgage Title Entry and Possession; Strict Foreclosure) and each has its advantages. This is not a treatise on each, but some of the largest and most obvious ones will be explained. Government backed loans like FHA and VA among others will take their backed properties when the bank overseeing the loan makes the decision to call the loan due because of too many missed payments. They will contact the Government Agency about the defaulted condition and the agency will buy out the loan and process this to the public with their own method. A good location on the internet to view these properties is www.hud.gov. Working in these areas will require you to confer with a real estate agent, and can be very profitable.
One of the most profitable areas that investors can become involved in is called traditional foreclosures. Banks, mortgage companies and finance companies are some of the main lenders. As these institutions work out debt agreements for mortgages and trust deeds, others previously started may fall into extreme circumstances causing action to rectify the broken agreement. Foreclosure is their only solution. The following steps will cover two main areas of this process:
- Judicial Foreclosures: These are debt instruments called mortgages (comprised of a borrower and a lender).
- Judicial Foreclosures begin with non-payment. The lending institution will send out notices for missed payments, request payment as soon as possible and have the owner include a late fee. They will also make a complaint on their credit record.
- If the non-payment persists the lending institution will begin the foreclosure process, formally and legally, by filling a Lis Pendens (this is Latin for legal action pending) at the courthouse. The courthouse will, issue a case number, date, time and place for review by a judge, name the owner (being filled against) as the defendant and the lending institution as the plaintiff. They will hand deliver or send a certified mailing to each party involved in this case. The importance is that it is now public record and anyone can view this information.
- The Lis Pendens filling starts the period of redemption. This is an umbrella protection for the owner/defendant. It is to protect the owner from anyone selling his real property in litigation without his expressed consent. It will cover all steps of foreclosure until the auction/sale. In some states this 'period of redemption' picks up after the auction/sale for a specified time.
- There will be a published legal notice in a local paper stating basic information about the proposed foreclosure sale.
- A judge will review this case at the appointed time, place, date and render a decision. The defendant is rarely present and, therefore, the plaintiff will ask for a judgment, which will be to proceed through the foreclosure process. The judge will call for a public auction of the real estate property and will specify the time, place and date.
- A public auction (often referred to the 'sale') will take place at the appointed time, date and place where the highest bidder will be awarded the property. The lending institution will make their minimum bid to cover their investment. If any others are present, and many times there are none, the highest bidder wins. The lending institution's bid includes any superior liens (government liens from unpaid taxes). Any liens subordinate to the lending institution's position will be wiped out. If the lending institution wins the bid the property will be called an 'REO' meaning real estate owned.
- Non-Judicial Foreclosures: The debt instrument is called a trust deed comprised of a beneficiary (the lending institution), a trustee (usually a lawyer who works for the lending institution) and a trustor (the owner buying the real estate property from the lending institution).
- Non-payment is the first step in this process. The lending institution will send out notices for missed payments, requesting payments as soon as possible and have the owner include a late fee for each. They will also make a complaint on their credit record.
- If the non-payment persists the lending institution will begin the foreclosure process, formally and legally, by filling a notice of default at the courthouse. This step makes the action public notice. This begins the specified days until the auction/sale of the property. In many states it is 90 days from the filing to the auction/sale.
- The notice of default initiates the period of redemption. This is an umbrella protection for the owner/defendant. It is to protect the owner from anyone selling his real property in litigation without his expressed consent. It will cover all steps of foreclosure until the auction/sale. In some states this 'period of redemption' picks up after the auction/sale for a specified time.
- During this period there will be a published advertisement in a local paper telling the public about this property, all parties involved and the projected auction/sale.
- The auction/sale will take place according to the trustee. A public auction (often referred to the 'sale') will take place at the appointed time, date and place where the highest bidder will be awarded the property. The lending institution will make their minimum bid to cover their investment. If any others are present, and many times there are none, the highest bidder over the banks bid wins. The lending institution's bid includes any superior liens (government liens from unpaid taxes). Any liens below the lending institution's position will be wiped out. The highest bid wins the property. If the lending institution wins the bid the property will be called an 'REO' meaning real estate owned or bank owned real estate.
In understanding the foreclosure process always check with the courthouse or the legal professional to see what your area upholds in this process. The information here given is not to be understood as the absolute law in your area.