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Foreclosure

The Foreclosure Process

Foreclosure Notice

Foreclosure - Bargain Opportunity??

There’s a lot of talk regarding the purchase of foreclosure properties in the news right now, but exactly what does it take to purchase a foreclosure property? And how does this process differ from just buying a house that is listed for sale through a real estate company? This post will explain some of the basics behind the foreclosure process, and the risk/reward associated with purchasing in each phase.

Pre-foreclosure

This is the first phase of the foreclosure process. This period begins as the lender sends a Notice of Default to the homeowner. This is a legal document that informs the home owner that they are in default of the terms of their loan agreement and that the lender may elect to pursue foreclosure. At least 60 days must pass between this notice and the event where a public auction for the property is held. The Notice of Default is a legal, filed document and is accessible through public records search.

The Notice of Default is followed by a legal document called a Lis Pendens. This is the legal filing of the lender’s intent to foreclose. This is the point in the process where the government has recently contemplated placing a 90 day delay in the foreclosure process to allow the homeowner to recover before the foreclosure process continues. Again, this document must be filed and is available through public records search.

During the period of Pre-foreclosure, you must deal directly with the home owner (or their real estate agent). It is during this period that a “short sale” may occur. A short sale is the sale of the property for a price less than what is owed to the lender. The lender must approve the short sale, and although a cumbersome process, it can lead to the purchase of the property at a great price.

Foreclosure

If the homeowner is unable to reach agreement with the lender for either a restructured loan or a short sale, the next step in the process is Foreclosure, which begins with a public auction. The property is held for auction on the “courthouse steps” on the first Tuesday of the month. This is a sealed bid auction process, and the property is sold to the highest bidder. The lender will usually submit a bid for the amount still owed on the mortgage, and is frequently the highest bidder.

This can be a great event for someone to purchase a property at a highly discounted price, but comes with significant risk. In most cases, access to the interior of the property is not possible, which greatly limits the buyer’s inspection of the property prior to purchase. This is also a cash sale, so unless you are able to write a check for the property, it may not be a feasible purchase point.

Post Foreclosure

Following the auction, the lender frequently walks away with the property. The lender will then take the property to market, frequently through a real estate broker. In the MLS system, these properties are noted as foreclosure sales. The purchase of these properties works very much like the purchase of any other property for sale in the MLS, with a couple of distinct exceptions. First, these properties are usually sold on an “As Is” basis, meaning that no repairs are performed by the Seller (now the lender). Also, since the Seller has never occupied the home, it is impossible for them to provide an accurate disclosure about the properties history, so they don’t. It becomes incumbent on the Buyer to have the property inspected to determine it condition, and to make an offer appropriate to the physical condition of the property.

Buying foreclosure property can be a great way to obtain a home that has instant equity, but there are a number of heightened risks along the way. I strongly encourage you to seek the opinions of professionals in this process, it will make the whole process much easier, and the final outcome much more pleasurable.