Foreclosure Overview

 

What is Foreclosure?


Foreclosure is a process that allows a lender to recover the amount owed on a defaulted loan by selling or taking ownership (repossession) of the property securing the loan. The foreclosure process begins when a borrower/owner defaults on loan payments (usually mortgage payments) and the lender files a public default notice, called a Notice of Default or Lis Pendens. The foreclosure process can end one of four ways:

1.        The borrower/owner reinstates the loan by paying off the default amount during a grace period determined by state law. This grace period is also known as pre-foreclosure.

2.     The borrower/owner sells the property to a third party during the pre-foreclosure period. The sale allows the borrower/owner to pay off the loan and avoid having a foreclosure on his or her credit history.

3.     A third party buys the property at a public auction at the end of the pre-foreclosure period.

4.     The lender takes ownership of the property, usually with the intent to re-sell it on the open market. The lender can take ownership either through an agreement with the borrower/owner during pre-foreclosure or by buying back the property at the public auction. These properties are also known as bank-owned or REO properties (Real Estate Owned by the lender).

Foreclosure Opportunities

Pre-Foreclosure:

Buying a property in pre-foreclosure involves approaching the borrower/owner and offering to buy the property outright. The borrower/owner can walk away with the equity in the property and avoid a bad mark on his or her credit history. The buyer has time to research the title and condition of the property and can realize discounts of 20-40 percent below market value.



Public Auction:

If the loan is not reinstated by the end of the pre-foreclosure period, potential buyers can bid on the property at a public auction. Buyers often are required to pay in cash at the auction and may not have much time to research the title and condition of the property beforehand; however, a public auction often offers some of the best bargains and avoids the unpredictability of dealing directly with the borrower/owner.



Bank-Owned (a.k.a. REO):

If the lender takes ownership of the property, either through an agreement with the owner during pre-foreclosure or at the public auction, the lender will usually re-sell the property to recover the unpaid loan amount. The lender will typically clear the title and perform needed maintenance and repair; however, the discount for these REO homes is typically less than a pre-foreclosure or auction property discount. Bank foreclosures can become government foreclosures if the loan is backed by a government agency such as the Department of Housing and Urban Development (HUD) or the Department of Veterans Affairs (VA). In that case the government agency would be responsible for selling the property.

Foreclosure Investing 101 


 You’ve decided you have the knowledge and the resources to follow the foreclosure
marketplace, so the next step is, what are you going to follow? Procedures are very
different for following pre-foreclosure compared to properties already foreclosed by
financial institutions.

Pre-Foreclosure Information is everything! If you don’t know what properties are scheduled for sale,
you are wasting your time. You need to know what properties, how much the loan amounts are
and what timeframe you are dealing with. Local newspapers will publish the properties
scheduled for sale, this will provide some information and all you have to pay for is the
newspaper subscription. You can also go to the county recorder and research documents
yourself, but the best way to follow these properties is to subscribe to a service that
obtains records and sells the information. The best services give complete, accurate
information and others provide the basic minimum, but it saves time spent looking them up for yourself. Once you know which properties are in default, you can approach owners
directly to sell, arrange financing to save the property or whatever seems appropriate for
all the parties involved. Door-knocking, mailing information or telephone contact, it’s
all based on knowing which properties fit your criteria. You can find some providers of
information at Pre-Foreclosure Listings or you can go to the
sale sites in your area and ask the investors who show up for the sale what local
providers are available. If they don’t want to tell you, ask someone else until you get
the information you need.

Foreclosures Banks are driven by numbers. Their non-performing assets do not generate income, they
require reserves to be set aside in addition to the loan amount and large numbers of
non-performing assets do not look good on the bottom line. So, if the financial
institution doesn’t really want to be carrying these properties, why don’t they sell it
cheap? First, if a bank has a large portfolio of bad loans and they do not want to carry
them on their books, they sell the loans as a portfolio at a discounted price to companies
in that business. Second, if they have taken a property back and now own it, why wouldn’t
they want to get as much as they can for it? It’s called cutting your losses. If you want
to buy from a bank, find properties you might be interested in by either following the
auction sales or using a service that gives you fresh REO information.  Fresh
information will allow you to put an offer into the bank before they will have any
additional costs in the property and will be more likely to cut a deal. Your best
opportunities are going to be properties that need a lot of work, have something wrong
with them, or that are in a slower moving market. Banks seem to take forever to respond,
place an offer with limited acceptance period, wait out that period, then go on to other
things. Placing an offer at 60% of market value is something that probably won’t fly. Be
realistic about the property, your requirements and the bank’s position and an offer just
might be accepted.
Another possibility is to look for the dogs. Properties that have been on the market for a
long time either are overpriced, are ugly or have some other problem. If you feel these
problems can be overcome, a bank just might be willing to sell at a reduced price.