Foreclosures offer an array of investment opportunities both for seasoned entrepreneurs, as well as novice investors. Given that there is a clear motivation to sell, foreclosure properties are usually sold below or at market value, which gives buyers the chance to either flip, rent or wholesale the property and make a substantial profit.
The following article examines both the foreclosure process and the existing investment opportunities, before, during and after foreclosure:
Foreclosure Process Based On Your State
The foreclosure process varies from state. There are two types of foreclosure states: judicial and non-judicial foreclosure states. In judicial foreclosure states, the foreclosure process involves the courts, which will oversee the auction. In non-judicial foreclosure states, such as California, the bank can foreclose on a property without filing a lawsuit, meaning the auction will be carried out by a trustee appointed by the bank. The non-judicial process tends to be relatively quick.
The Foreclosure Process
After the bank files a notice of default, which indicates that the homeowner is delinquent on their mortgage payments, the occupant is given a time frame to make good on their payments or to request a loan modification. If no action is taken by the homeowners, a foreclosure sale will be conducted. The auction can often can be postponed or canceled if the homeowner takes legal action against the bank. If a judgment is rendered in favor of the bank, the foreclosure sale can proceed.
The Foreclosure Sale
In a judicial foreclosure, the bank must file a lawsuit in court. The homeowner will be sent a summons and a copy of the foreclosure complaint. The homeowner can allow the foreclosure to be executed or challenge it in court. If they choose to challenge the foreclosure, a hearing will be held. If the judgement is in favor of the bank, the judge will set a foreclosure sale date. If the homeowner chooses to not challenge the foreclosure lawsuit, a default judgement will be entered in favor of the bank.
On the date of the foreclosure sale, a sheriff, judge or officer of the court will auction off the property inside the courthouse or on the courthouse steps. If the asking price, which tends to be a guideline and is expected to be exceeded by at least $1,000, is not met, the property will be sold to the bank, becoming a real estate owned or REO property. At auctions, bidders are required to either bring cash or cashier’s checks as a deposit or sometimes for the full amount of the purchase price.
In a nonjudicial foreclosure, the deed of trust issued when the property was bought allows a trustee to foreclose on the property if the mortgage loan is defaulted on. Individual state laws dictate the foreclosure timeline, as well as when the homeowner must be notified and how the property will be sold.
Usually, the homeowner will be allowed up to 120 days to cure the default or work out a payment plan. If they are unable to do so, a date will be set to sell the property. The bank will then appoint a third party sales agent to execute the foreclosure sale or auction, which will be held on the courthouse steps, at the property, or in a private location. If the minimum bid at the auction is not met, the property will be sold back to the bank and become an REO property.
Other Ways Of Purchasing Foreclosure Properties
Auctions are not the only way of purchasing foreclosure properties. The following is a list of other ways to invest in foreclosures:
- Pre-foreclosure sales involve contacting distressed homeowners following a notice of default with an offer to purchase their property in order for them to avoid foreclosure.
- Short sale also occur before the foreclosure process begins. The bank or owner will usually list the property with a real estate agent to avoid entering the foreclosure process.
- REO sales take place after the foreclosure property if the bank places the winning bid on the property, which is often the case. REO properties also tend to be slightly below market value in order for the bank to recoup its losses. REO properties are many times listed by banks on online real estate auctions sites.