The Stages of Foreclosure: An investor’s guide

This is part two of our series on formulating a real estate investment business plan.

There are many stages of foreclosure – and they will very much depend on the property’s location and jurisdiction. A home that is a pre-foreclosure is a short sale or one that the owner is about to lose. If the lender has already instituted a formal foreclosure proceeding, then it is in the first stage of foreclosure. The foreclosure process depends on the laws of where the property is located. So the lender must follow the laws to the letter or they have to start the process over again.

The lender must either foreclose through a formal judicial foreclosure process which requires court approval of the sale or a private trustee sale, which does not require court approval. Some states allow the lender to foreclose by either method. Check the foreclosure laws of the state where you are buying property. You might want to consult with a real estate attorney to make sure you fully understand the laws and procedures.

Trash Fence Real Estate Auction © by aturkus

Once the home is in foreclosure, the owner has a certain amount of time to redeem the property by paying the default amount and any other costs. Some states allow the former owner to redeem the home post foreclosure sale. The owner may have other options to try and negotiate with their lender to prevent the foreclosure. This is where you as the investor can be helpful because you can offer to purchase the home and save both the lender and the owner money and time.

Buying a foreclosure at the right price is about communication
The best part is you get to purchase a discounted property. The seller can negotiate a short sale or mortgage modification, if they want to keep the home during the time the home is in foreclosure and up to the time the home is offered for sale at a foreclosure auction. Foreclosures are complex and very emotional for the sellers/owners.
If you are tracking a foreclosure default notice filed against a property, the first step you will need to do is to contact the seller and see if you can help by purchasing the property before it gets foreclosed. Find out if there is mortgage. If there is, then ask how much they own the lender.

If the seller is upside down, then the seller would have to contact their lender and get approval to sell you the home for less than they owe their lender. That process is referred to as a short sale transaction. Many times people are in denial and do not want to admit that they are going to lose their home. They are embarrassed and scared. You can help reassure them by telling them you understand their predicament and only want to help. They may not be receptive to your offer to help at first. Or you simply may not be able to agree on the price and terms. If you really think the home is a great bargain, then you might have to wait until the lender actually completes the formal foreclosure process and make a bid on it at the foreclosure auction.

Of course, there could be a long wait until the home actually is put up for sale at auction. Some homes are sitting empty or owners are still living there and not paying their mortgages for as long as year or two before the lender actually completes the foreclosure process. In the meantime, you might want to focus on other deals that you can purchase now and put this home on the back burner.

You can track the process by checking the public records. Once the property is ready to be sold at the auction, then a notice is published in the local newspaper and usually at the property to let the public and the former owner know about the sale.

The mechanics of bidding at a foreclosure auction
Before you bid on a foreclosure, you should check the foreclosure laws. The last thing you want to do is purchase a foreclosure, and then rehab it to find out later that the former owner has decided to redeem the home, and you lose your money. If there is no post sale redemption period, then you can bid on the home at the foreclosure auction. You will need to check with the sheriff or auction company regarding the rules and the amount of the deposit. Typically, a 10% deposit of the purchase price is required in the form of a cashier’s check to bid.

Most foreclosure homes are purchased for cash. The highest bidder is awarded the property. Homes are sold as is and without any warranties or title insurance. The new buyer is responsible for paying off liens and evicting any former tenants or owners at the property. You should have a title company perform a title search before you bid to make sure you are aware of any liens that you are responsible for paying off. It is also a good idea to drive by the property to check out the neighborhood and see if anyone is living at the property. Have your cash or financing available because you have to pay for the auction home immediately.

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