FAQ: What is a Foreclosure?

You have no doubt heard in the news of all the properties around the United States “in foreclosure,” and how that is driving the current downturn in real estate. Foreclosure is a legal process in which the lender is able to take possession of the home in cases where the homeowner can no longer keep up with his mortgage payments.

Remember that foreclosure is a legal process, like probate or divorce. Generally there are 2 ways lenders can take control of a property: a judicial process is conducted through the court system while a non-judicial process is not. California allows both processes, but the judicial process is hardly used.

In California, the process starts with a Notice of Default (NOD) that is filed with the county recorder. This occurs when the borrower misses 3 monthly mortgage payments. During the time of these missed payments, the lender has undoubtedly attempted contact with the owner by mail and phone to negotiate payment methods. The lender would have also given the owner a Notice of Intent to Foreclosure, which gives a deadline to cure the missed payments. The NOD is an official document that is filed after the deadline in the Notice of Intent to Foreclosure has passed.

Once the NOD is filed, the trustee notifies the homeowner and all parties with interest in the title. A sale date is set 3 months after NOD. (I have documents emphasizing that it’s 3 months and not 90 days as erroneously printed in many public outlets). The lender publishes a Notice of Sale (NOS) in approved newspapers once a week for 3 consecutive weeks and mails the NOS to homeowner and all parties with interest in the title.

At the appointed sale date, a Trustee Sale is held where the home goes to public auction. If there is no bidders willing to post the minimum bid on the property, the home is given to the lender as a Real Estate Owned (REO) property.

Foreclosed homes also offer an opportunity for those buyers looking for homes for themselves or for investment. The earliest opportunity is before the home is foreclosed on – during the pre-foreclosure period. You might see these homes as “short-sale” properties as well (please view last month’s FAQ regarding short sales at http://changhomes1.blogspot.com/2007/11/faq-what-are-short-sales.html). At this stage, which lasts through the Notice of Default or Lis Pendens, the potential buyer should approach the owner/seller and offer to buy the property directly or through a real estate agent. Sellers are motivated as they do not wish to have any negative marks on their credit report and would rather “wash their hands” of the home. By paying off what is owed (or less than what is owed in a short-sale situation), the owner can avoid the rest of the foreclosure process.

At the Notice of Trustee Sale, the home will go to auction. Public auctions require buyers to pay in cash, and the buyer may not have enough time to research the title and the condition of the property to satisfaction beforehand. You may be able to contact the owner if you catch the announcement right away to see if you can buy the property, otherwise, contact the trustee for potential deals.

If a property is not sold at an auction (doesn’t reach minimum bid), the bank takes ownership of the property. These properties are called “Real Estate Owned,” or REO. Lenders are not in the business to manage homes, so they are likely to sell the home to recover some of the unpaid loan amount. So contact the lender to get these homes. There is no set timeframe within which the banks must sell their REOs; however, banks often want to get REOs off their books rapidly. As a result, many REOs sell quickly. The only exception is if there is a "redemption period" (as in California) for the owner to buy back the property after it is repossessed by the bank. State law dictates if there is any redemption period. The bank will typically wait until the end of any redemption period to sell the property.

Keep in mind that sometimes contacting the lender can be frustrating, as the main purpose of a lender is to loan money, not to sell property. So even though the bank may have a department that handles bank-owned property for sale, that department may be hard to track down. If you need assistance, contact me as I have some ways I can reach these hard-to-find decisionmakers.
The bank will clear title and perform repairs, but at this stage, the bank would have already set a price at which they would want to sell the property to recoup all their losses. Hence, it leaves little room for negotiation, but often the home is priced about 65% of how much was owed on the property initially.

Notice throughout this process that you may get a good deal on the property, but as more homes in the neighborhood undergo the same foreclosure process, the market price of all these homes will go down to potentially this “65%” mark. Even though a home may be an REO, it might be selling for the current market prices of those homes in the neighborhood.

Before you buy foreclosure homes, you need to research foreclosure data. A good site I’ve found is RealtyTrac.com, but of course, I encourage you to contact me for a complete evaluation of the market and to help you evaluate potential homes you seek.

Questions answered in this column were asked by my clients, past clients, or prospective buyers and sellers. The questions were answered when they were asked, and they were notified if the question is a candidate for the FAQ column. Questions are chosen based on interest to a wider audience, timeliness to the current market, and possibly other factors. Those whose questions are featured in this column get a gift card to their favorite store, restaurant, mall or movie theatre in the Tri-Valley area if they allow me to publish their name or initials and the city in which they live in this column. You can email your questions for a prompt response to changhomes@gmail.com.