How Mortgage Foreclosures Work
Real Estate expert, Jeff Adams, explains how the foreclosure process works. If you want to buy a foreclosure property at a bargain below-market price, you need to know how foreclosures work.
STEP 1—LENDER RECORDS A NOTICE OF DEFAULT OR FILES A JUDICIAL LAWSUIT AGAINST THE DEFAULTING HOMEOWNER
The first step in a foreclosure on a mortgage, deed of trust, mechanics' lien, income tax lien, judgment lien or homeowner's association lien is to record a notice of default or file a judicial lawsuit against the defaulting homeowner. Exact procedures vary in each state.
The homeowner is given a reinstatement period in which he or she can attempt to cure the default. The speed of the actual foreclosure sale varies widely by state law. It can be as short as 21 days in Texas to as long as six to 12 months in a few states. Three or four months is typical for most states.
During this first step of the foreclosure procedure, the homeowner is free to sell or refinance the property. This period can be a great buying opportunity for purchasers, but they should be aware that they will be buying the home subject to all existing encumbrances on the property.
STEP 2—THE FORECLOSURE AUCTION
The next step occurs when the reinstatement period ends. Then the foreclosure sale takes place.
Depending on the type of mortgage, deed of trust or lien being foreclosed, the foreclosure auction might be conducted by a judge, sheriff, court referee or independent trustee. Foreclosure auction locations include courtrooms, the steps of city hall or even in front of the property.
If there are no bidders at the auction, the foreclosing lender or lien holder usually submits a credit bid for the amount owed, plus legal fees and other foreclosure charges, and obtains title to the property.
Bidders at foreclosure auctions should be aware they are buying the property subject to any prior existing liens, such as a first mortgage if the sale is being conducted by the second mortgage lender.
If there is a recorded Internal Revenue Service lien on the property, the IRS has an automatic four-month redemption period after the sale during which it can buy the property from the high bidder for the amount paid.
STEP 3—BUY AFTER THE FORECLOSURE AUCTION
If you don't have enough cash to buy at the foreclosure auction, you're not out of luck. You might still get a bargain wholesale purchase price.
If there were no bidders at the foreclosure sale, the foreclosing lender then would take ownership the property, wiping out any junior liens. Now is the time to reach the lender and bargain.
Jeff Adams
I am a Realtor in California. It seems like most lenders will negotiate with a buyer after teh forclosure sale. They want to list it with an agent. Leders have a meticulous step by step process that they adhere to. I have a cash offer for a client to Countrywide. They cannot even decide what agent to use. I am working with their 3rd agent after submitting my clients cash offer to the first 2 agents that did not get the listing for who knows what reason. This 3rd agent says Countrywide will not even look at an offer till they go thru their step by step process to finally arrive a a signed listing agreement. It is no wonder banks are going under...they seem to be making mistakes on most reos they are taking back. It has been over 2 months since Countrywide took this property back and they won't look at an ALL CASH offer. We should have had a deal by now. Meanwhile value is falling daily. Not very smart on the banks part. It's almost like they are screwing up on purpose.