Foreclosure Stages

Pacific Beach Real Estate, Mission Beach Real Estate, San Diego County Real Estate

Stage 1: Pre-foreclosure

When homeowners default on their mortgage, the property is considered to be in a state of pre-foreclosure. Lenders are typically quick to respond to that first late payment, beginning with phone calls to the borrower. How the foreclosure process actually proceeds from this point forward varies greatly from state to state. For example, it's important to know how your state determines property ownership prior to foreclosure, since this largely dictates which steps will be taken and how long they will take. In lien-theory states, the deed is held in the borrower's name and a lender will place a lien on the property by means of the mortgage instrument. While specifics vary, lien-theory states tend to favor borrowers because they usually require that a judicial action be taken against borrowers which typically requires more time. In title-theory states (e.g., California), lending institutions hold title to the property while borrowers receive a deed of trust. Until the loan is paid in full, the title remains in the lender's name (owner has "bare legal title"). Title theory tends to benefit lenders because it usually doesn't require a judicial action to move toward foreclosure.

From the Homeowner's Perspective

During pre-foreclosure, homeowners are very likely to feel embarrassed and threatened by the phone calls and letters they begin to receive from their lender. It is generally true, however, that lenders are more interested in devising workable solutions than continuing the foreclosure process. Troubled homeowners should be encouraged to respond to their lender because if they don't, the problem will only get worse.

Homeowners typically have many more options available to them for working out of a difficult situation if they contact their lender sooner rather than later. In fact, some remedies may only be available in the early stages of delinquency. Explaining to the lender why payments have fallen behind...whether it's a short-term issue like a job loss or something more permanent (e.g., long-term illness which prevents full-time work, etc.) will go a long way toward finding a cooperative solution with the lender. Perhaps the homeowner can make partial or interest-only payments for a while. Or maybe the loan can be restructured into a new program that requires a smaller monthly payment via a longer term.

During the pre-foreclosure period, owners in financial distress may also receive inquiries from private investors. Because pre-foreclosure properties are publicly recorded, it's not difficult for potential buyers to identify distressed homeowners and make direct contact with them. Are these offers worth considering? It depends. Some offers to get out of debt are blatant fraud attempts. Homeowners should never feel pressured and certainly should not sign any papers without first having them reviewed by an attorney.

Now, if the homeowner can negotiate an attractive solution with a legitimate private investor, this option is certainly better than letting the situation move into foreclosure, which generates a black mark on the defaulting homeowner's record, seriously constricting their future access to mortgage financing and other forms of credit.

During the pre-foreclosure period, if the homeowner doesn't send payments to the lender or otherwise attempt to resolve the situation, the lender will issue a formal Notice of Default (NOD), the recordation of which begins the formal foreclosure process and also initiates the "reinstatement" period which is that time period when the homeowner can reclaim the property by paying the past-due amounts in full or the loan balance. These redemption periods vary by state, but here in California, the period spans a minimum of 90 days. Then, if the terms of the NOD are not met by the specified deadline, a Notice of Sale will be issued, which officially moves the property into the final stage of foreclosure.

From the Buyer's Perspective

Buyers may find that properties in the pre-foreclosure period are attractive investments. While it's unlikely that a highly discounted price can be negotiated, especially for desirable properties, there are several advantages to purchasing at his stage.

First, there may be less competition from other investors before the property is put up for public sale.

Secondly, if you're sensitive to the homeowners' situation and approach them in the right manner, you'll improve the odds that a cooperative agreement can be reached, eliminating many of the problems and uncertainties that make purchasing foreclosure properties at auction such a risky business.

Homeowners will be more receptive to win-win solutions that truly help them at a difficult time rather than take advantage of their misfortune.

If you're able to engage their cooperation early on, you'll also be more likely to gain access to the property for inspection purposes and be able to discover what, if any, encumbrances may exist.

Stage 2: Sale/Auction

Following a Notice of Sale, a lender typically lists the foreclosure property for sale at auction. The timing and procedures of these sales again, vary by state and to some extent, sales terms will be determined by the lender. In California, 21 days is the minimum period between issuance of the Notice of Sale and the actual public sale which is termed, a Trustee´s Sale. After the public sale, there is no right of redemption by the trustor (owner). Some lenders may even opt for a short sale which means the property is sold for less than the amount of money owed, simply to remove a non-productive asset from the lender´s books.

From the Homeowner's Perspective

In many states, once the Notice of Sale has been issued, the distressed homeowner has run out of options.

In some instances, however, the bank will still want to work something out. Also, some states call for a right of redemption period after the sale, giving the foreclosed homeowner up to 365 days to recover their property.

In these cases, a new buyer is issued a bill of sale -- not a title -- and runs the risk of losing the home until the end of the redemption period, unless the lender is able to purchase the foreclosed homeowner's rights of redemption. Again, in California, this is not the case as there is no right to redeem by the former owner.

From the Buyer-Investor's Perspective

Frequently, the best bargains in distressed properties can be found at the Trustee´s Sale, although numerous pitfalls can be encountered. First, it's fair to say that the purchaser will not have complete information about what they're purchasing. Because defaulting homeowners frequently still occupy the home up to the point of actual sale, they are not likely to open their doors to show anyone around. The buyer won't be able to see beyond the exterior, much less gain access to the inside in order to inspect the property or calculate market value. In this type of sale, there are no requirements to disclose flaws and properties are sold" as is," without any warranties.

It may also be difficult to determine if there are any old debts that could surface later as liens on the title. For example, you may become obligated to settle with the contractor who put a new roof on the home, but was never paid. And if the homeowners are still in the home, you'll have to contend with the awkward business of evicting them, facing the additional risk that they will damage the property before they vacate.

Another challenge can be paying for the home. Usually, public sales typically require all-cash payments, meaning that your financing will need to be in place well in advance of the auction.

Stage 3: Real Estate Owned (REO)

If a foreclosure home does not successfully sell at auction, it moves into the lender's inventory and is considered a real-estate owned (REO) property. Generally speaking, lenders don't like to hold non-performing assets, especially ones that require upkeep and maintenance so they may be motivated to sell. At the same time, lenders still want to maximize their profits and are unlikely to accept deep discounts.

From the Buyer-Investor's Perspective

Buying foreclosure property at the REO stage is typically the easiest and most straightforward approach, especially for investor-buyers new to foreclosures. Many of the risks that are present at the auction stage have now been eliminated. However, the potential return on investment has also been reduced. On the other hand, expenses such as taxes and liens, that aren't generally covered in an auction sale, may be covered by the lending institution in an REO sale.

If the home is held by a smaller bank, you may be able to negotiate a purchase directly with the lender. It's likely, however, that you'll be working through an outside real estate agent who has been retained by the bank to work on their behalf to... guess what? Yes, their duty, just as if they were working for a private seller, is to get the highest possible price for their client, the lender.

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