How do foreclosures work; and should I be looking for one?
One of the most common statements I hear when meeting buyers just entering the market is “I am also interested in foreclosures”.
What I generally follow up with is asking what they know about the foreclosure process, as most consumers have just heard that you can get a good deal when buying a foreclosure. This does hold some truth; however, the process is much different that most consumers understand!
Pre-foreclosure essentially starts when a homeowner misses a payment for the first time. Every lender is different, but generally if you have not caught up within 60-90 days the lender will file a notice of default. This is the first step in foreclosure that any lender must do. They must then advise the homeowner within 10 days that they have filed the notice of default. Once filed, the homeowner has a required 90 days to make arrangements with the bank or bring the loan current. Banks cannot take any further actions until the 90 days have passed since filing the notice of default.
If the homeowner does not make arrangements agreed to by the lender or bring the loan current, the lender then has the right from that point forward to file a notice of trustee sale. This sale is when a consumer can first take action to buy the property. Once the notice is filed, the bank has to wait 20 days. Starting on day 21, the bank can then elect to sell the property through a trustee sale. During this 20 day period, the sale could be postponed. If the homeowner hires an attorney, restructures their loan, attempts to do a short sale, or declares bankruptcy, the sale could be postponed. The bank could also decide to postpone the actual sale for up to 1 year. After 1 year, they would have to refile the notices again and start the waiting period over. Each bank moves at different speeds and there is never a sure-tell sign of when they will actually do the sale.
Trustee sales are posted on websites like propertyshark or realtytrac with memberships. Consumers often think that this is where they can step in to get a good deal. However, trustee sales are really geared toward investors. Trustee sales happen at the county courthouse, generally out on the steps. In order to purchase a property here, you bid but you must pay in cash by the end of the day. This is generally the limiting factor as to why it is predominantly investors – it must be a cash purchase. Properties are typically not able to be seen or toured prior to the sale. Inspections are not done. And you are always buying the property in its current as-is condition. Also, a clear title is not ensured. So, liens on the property can be passed on to the buyer.
If you do bid and win, you then become the owner of the property and have the rights to the home. However, many times the old owner is still living there. Not all will leave peacefully. In that case, you must go through the eviction process, which can also be a bit lengthy and a headache.
The bank also has the right to bid and buy the property back themselves. If they do so, it then becomes what we refer to as a ‘bank-owned property’ or ‘REO’. Most the time, these properties are then listed by a realtor the bank works with and goes on the MLS like a normal sale but will be labeled as REO. This means that the property was already foreclosed on, the bank bought it back, and they are now selling it on the open market. It does go through the more normal buying process in which you can get title insurance to insure a clean title. Also, the owners have been evicted from the property before it goes on the market. This process is the one most consumers are likely to see and potentially take part in. However, you typically will not see the savings you could potentially see at the trustee sale.
Hopefully, this helps clarify a bit about the process and whether you as a consumer would be able to be involved in purchasing a foreclosed process.