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What do you know about the foreclosure process?  Foreclosures are a key component of the real estate market today. Understanding the process will help you to understand what is happening in your market.

Check out an example of the process in California.  Luis is a California homeowner who rents out a bedroom of his home.  His renter found a job in another state and moved out.  Without the income from the rent, Luis couldn’t afford to make his mortgage payment.

Luis had trouble finding a new roommate because he had 3 big dogs and they made the house smell.  When Luis became 2 months past due the lender started calling and sending notices of late fees.  Luis didn’t know what to do.  He couldn’t afford to make his regular payment, let alone late fees on top of that.

After 3 months the lender filed a “Notice of Default.”   This is the beginning of the foreclosure process.  Different states may call it “Lis Pendens” instead of Notice of Default. Luis put the notice in a drawer figuring he would find a new renter at any time and use the security deposit to pay the mortgage.  Luis was in denial as are many people facing foreclosure.

90 days later, Luis still hadn’t found a renter.  The trustee filed a “Notice of Trustee Sale”.  In California 90 days is the minimum period between filing the Notice of default and the Notice of Trustee Sale.  The Trustee Sale was scheduled to be held 21 days later.  Again, this is the minimum period in California, other states may differ.

When the day of the sale came, the property was put up for auction.   At the auction anyone can purchase the property as long as they bid at least the amount of the mortgage in default including all fees and late charges accumulated.  Because the value of the property had dropped so much lately, nobody bid on the property.

Now the house became property of the lender since nobody bought it at auction.  This is called an REO (Real Estate Owned) property.  The lender didn’t really want the property, but foreclosure is the only recourse they have to try to get the money owed them.

Now the bank has a property that they can’t use and they don’t have the money they lent for it.  On top of that, the bank is required to keep money in reserve  for each property they own, plus they have to pay property taxes on it.

If it was just  Luis’ property the bank wouldn’t be in bad shape, but they have thousands of properties now.  They have to get rid of  some to stay in business.

So the bank listed the property for sale with a real estate broker.  The property was listed for well under what Luis originally owed.  The bank didn’t care.  They could write off the loss, and they had to get rid of some property for whatever price they could get.

How can you buy a property in the foreclosure process?

There are many ways to buy a property in pre-foreclosure or in foreclosure.

• The home owner can deed the property to you and you can cure the default and take over the mortgage.
• The owner can sell the property for the amount owed to the bank or more and pay off the mortgage.
• The owner can sell for less than the amount owed if the bank approves a short sale.
• The property can be bought at the foreclosure auction.
• The property can be bought after the bank has taken it back in foreclosure.

At any of these points it is possible to get a good deal on a home, depending on the particular circumstances.  If the homeowner has some equity, he can deed the house over to you.  If you make up the late payments and fees you can continue to make the payments subject to the existing financing.  If they had a good loan but were just unable to make the payments you may get a bargain this way.

The owner can also sell the property and use the sale proceeds to pay off the mortgage.  This process may take longer because a new loan might be required.  Sometimes there isn’t enough time for a normal sale.  He will also have to pay some closing costs and maybe a broker’s commission out of the sale price.

If the owner can’t sell the house for enough to pay off the mortgage, broker and closing costs, the bank may approve a short sale.  This is where the bank accepts less than the amount due for the property.  This can be a lengthy process to get approval from the bank.

The trustee sale (also known as sheriff’s sale) can be a good place to get deals, but it is the most risky.  Properties are sold “As Is” and you  don’t get much chance to inspect ahead of time.  Usually, you will be required to show proof of funds and bring a substantial deposit before you will be allowed to bid.  Also a bidding frenzy can drive the price up if you aren’t careful.

REO properties can be sold by the bank for market value or at a discount depending on the bank’s financial situation at the time.  In the current economy many banks are selling properties for well under market value.  Some houses are even selling for as little as $10,000. Look in the sidebar of the blog for some resources to find foreclosure properties online.