Forclosures

A fundamental key to making profit in the foreclosure market is understanding why the property went into foreclosure. Perhaps the owner just has a temporary cash shortage. You may be able to help them and take an equity position in the property in return for rectifying the situation. On the other hand, the owner may be financially devastated and just wants to dump the property before their personal credit is destroyed. You could help them solve their immediate problem and give them a new start.

The Foreclosure Process

In the United States, there are approximately 12 ways to foreclose on a real estate property. Each state has its own procedure and method of execution. They fall into the following major groups:

1. 1. Mortgage Lien and Judicial
2. 2. Mortgage Lien and Power of Sale
3. 3. Trust Deed Lien and Power of Sale
4. 4. Trust Mortgage Title and Power of Sale
5. 5. Mortgage Intermediate and Judicial
6. 6. Trust Deed Intermediate and Power of Sale
7. 7. Mortgage Intermediate and Power of Sale
8. 8. Mortgage Intermediate Strict Foreclosure
9. 9. Trust Deed Lien Judicial
10. 10. Mortgage Title Judicial
11. 11. Security Deed and Power of Sale
12. 12. Mortgage Title Entry and Possession

Each state has a specific system - a systematic process for the lender and the owner to follow in the foreclosure process. It is a good idea to understand the specifics of your state's process and the minor nuances.

How Property is Forclosed On

The lender follows a specific system of foreclosure to repossess the property or rectify the satisfaction of the debt. The states are split approximately 50/50 on the process.

First, there is Power of Sale. Good portions of the trust deed states use Power of Sale. Power of Sale tends to be a less expensive and quicker way to foreclose on the property. Under Power of Sale, the lender (trustee) informs the property owner the debt has not been paid and specifies a due date. In a few weeks, if the payment has not been processed a stronger demand for the payment is issued, often an immediate demand for payment. States regulate the period prior to public auction, approximately four weeks.

Under Power of Sale, the lender (trustee) informs the property owner the debt has not been paid and specifies a due date. In a few weeks, if the payment has not been processed a stronger demand for the payment is issued, often an immediate demand for payment. States regulate the period prior to public auction, approximately four weeks.

The process is sometimes complicated by FHA and VA properties. The federal government through their respective programs guarantees these properties. The programs have their own regulations and procedures for rectifying the debt obligation and listing of the properties. A deeper understanding of the FHA and VA process is encouraged. There are some outstanding opportunities in the FHA and VA foreclosure market.

Judicial Foreclosure governed by the courts accounts for the other half of our nation's foreclosures. Note that Power of Sale states usually have some form of judicial procedure.

Although slightly different in approach, both systems have essentially seven steps:

1. 1. Non-Payment. From time to time, we all may be a little late making our mortgage payment. The penalty for being two weeks late may be a $10 or $20 late fee and perhaps a mention on our credit report. Beyond two weeks, the lender starts to get a little anxious. They may let a month slide, with notice of non-payment, but very quickly, they begin to take the nonpayment seriously. The second month they will send notification of past due and approximately six to eight weeks after the non-payment, you can expect the phone to start ringing. The lender will try to solve the problem and work out a plan for repayment.
2. 2. Default. If payments continue to go unpaid, the note is moved to a default setting. Legal action is initiated. There is a demand letter asking for full and immediate restitution of the debt owed or the attorneys will file suit to foreclose.
3. 3. Lis Pendens. After default, a Lis Pendens (legal notice) is filed against the property. The Lis Pendens will include the following: case number (assigned by the court), lender (plaintiff), owner(s)/ (defendants), property, legal description, notice of foreclosure, and the attorney for the plaintiff.
4. 4. Complaint. The complaint lists the events that took place to force foreclosure. It will include a detailed listing of the mortgage amounts owed, period of non-payment, listing of the parties and property, a complete history of the mortgage, and reference to the official documents. At this point, the note is accelerated. The entire amount of the mortgage and related costs is due.
5. 5. Judgment. Final judgment occurs after a set period determined by the laws of the state. The defendant can still rectify the situation by paying the default. All fees have to be paid, including nonpayment court fees and legal costs. This does not mean negotiations cannot happen (by the owner or an investor). The lender will file a motion for judgment. When final judgment is granted, the plaintiff has the right to sell the property.
6. 6. Sale. After judgment, the motion of sale is put into action. An order for the sale is processed and a specific date for public auction is set.
7. 7. Redemption Period. The process of foreclosure can take anywhere from three months to a year from start to sale. Note that during this time the legal fees and costs are escalating and being attached to the property. However, an investor can acquire the property at any point during this period. Obviously, sooner would be favorable to later (due to fewer legal expenses and mounting costs). It changes by state, but generally, investors can intervene up until the day of the sale. On the day of the sale, a bidding war can erupt.