Understanding Foreclosure
When a property owner does not make the agreed to mortgage payments, the lender starts a procedure known as foreclosure. If the payment status is not rectified, the lender will eventually take possession of the property and dispose of it to recoup as much of their loan as possible. The process is largely the same regardless whether the property is residential or commercial.
Before the process formally begins, the lender usually contacts the borrower by informal letter, telephone calls, or both. However, shortly thereafter the lender will send a more formal notice of default. It is carefully worded according to law of the state where the property is located. The default letter states their intention to foreclose on the property unless the appropriate action by the borrower does not take place within the stated timeframe.
Assuming non-compliance with the terms of the default letter, and after the state mandated time period elapses, the lender proceeds to apply for foreclosure and eventual repossession of the property.
From the first contact to the actual repossession, the borrower can act several ways. The first and most obvious is, of course, to secure the needed funding and return the property back on the current loan status. This is not very common. If the funds were readily available, the problem would not have existed in the first place
Next, the borrower may attempt to sell the property to a third party. The terms and conditions of the sale must be approved by the lender since they have a lien on the property. If unsuccessful in selling the property, and if the grace period has expired, the lender may elect to offer it at auction.
If none of the above occurs, the bank completes the foreclose of the property by taking actual possession. The property then known as a Real Estate Owned (REO) property and the bank may try to sell it directly to a third party, or try the auction process.
As unfortunate as the foreclosure process is, it does provide some great opportunities for real estate investors. The best for all parties is if an investor buys the property during the pre-foreclosure phase. The lender doesn’t have the costs of foreclosure and resale, plus they get their funds back sooner. The borrower keeps his credit rating intact. A foreclosure on a borrower’s credit record makes it very difficult to get credit again for a long time. This method usually is also good for the buyer as they have time to research the title and determine the condition of the property before committing to the purchase.
If not all parties can be satisfied by negotiation, and the sale falls through, the buyer can bid for the property at auction. Auctions almost always offer better pricing for the buyer but there are pitfalls. First, auctions are usually cash sales. Financing, if any, has to be completed prior to the auction. Next, there is often less access to the property prior to sale.
The sale is typically “as is”, meaning that the buyer is responsible in advance for such things as inspecting the condition and checking the title. There is no opportunity to add these clauses to the purchase offer because there is no purchase offer. Buying real estate at auction is for the more experienced investor.
If the lender takes possession, they still want to sell the property so they are amenable to receiving a purchase offer from an outside investor. The lender is likely to have made sure the title is clear and may have done the needed maintenance. However, the investor needs to be sure. Unlike an auction, there is usually time to do these things, unless, of course, there is another potential investor also actively interested in the property
