Stages of foreclosure

A while back I said I’d talk about foreclosures but then I had a pile of work, plus I got all fickle and wanted to talk about what I wanted to talk about. Then someone messaged me and said “Hey! You SAID you were GOING TO TALK ABOUT FORECLOSURES, what the heck Joey? WHY ARE YOU LETTING ME DOWN?” So, here I am, talking about foreclosures.

First, let's talk about the stages of foreclosure (source, investopedia.com)

1. Pre-foreclosures

Property is in pre-foreclosure after the mortgage lender has notified the borrowers that they are in default but long before the property is offered for sale at auction. If a homeowner can sell the property during this time, they may be able to avoid an actual foreclosure proceeding and its negative effect on their credit history and future prospects.

Pre-foreclosures are typically listed in county and city courthouse buildings. In addition, many online resources, including Foreclosure.com, list properties that are in the pre-foreclosure phase. Pre-foreclosure, however, can be anything. An example is if you miss one payment, don’t notice, and go into default on your mortgage even though you keep paying. Or if two payments are accidentally applied to one month- like if you pay late once and early the next time. You just made foreclosure a possibility even if you keep paying, and the only way to fix it is to make an extra payment.

2. Sometimes a house gets foreclosed on and ends up in a sheriff's sale auction or a courthouse auction, which occurs after the lender has notified the borrower of default and allowed a grace period for the borrower to catch up on mortgage payments. An auction is designed for the lender to get repaid quickly for the loan that is in default

These auctions often occur on a city’s courthouse steps, managed by the local law enforcement authorities. The property is auctioned to the highest bidder at a publicly announced place, date, and time. These notices can be found in local newspapers and in many online locations by performing a search for “sheriff sale auctions.” A risk of a sheriff sale or courthouse auction is that the property may come with additional liens, other mortgages, tax liens, etc. Highly risky for the unseasoned investor. I recently read of a case where a newbie investor was thrilled to get a property worth $200k for $40k at auction, but then found out it was subject to another $90k in liens. Not great.

4.Properties that do not sell at auction revert back to the bank; that is, they become real estate-owned (REO) properties. They are often managed by the institution’s REO department. They are listed online in the MLS and represented by an agent. Online sources such as RealtyTrac have extensive listings of such bank-owned properties that can be searched by city, state, or ZIP code, but many are also accessible via the MLS.

5. Some homes are purchased with loans guaranteed by the federal government’s Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA). When these properties go into foreclosure, they are repossessed by the government and sold by brokers working for that federal agency.

Are Foreclosed Homes Are Cheaper?

The biggest selling point of foreclosed homes is, of course, their marked-down price—often significantly lower than other similar properties in the same area.

What makes these properties such a deal? If the residence is in the pre-foreclosure or short-sale stage, its owners are in a financial bind—and time is not on their side. They have to unload the property and get what they can while they can. In the Bay Area, competition can be tough, and sometimes a foreclosure does not add up to an incredible bargain, especially if you lack the experience to get through the permit and work process in your local area.

Property problems

A house in as-is condition can be pretty grim. If still occupied by the owners or tenants, it may be poorly maintained—if the owners can’t make the mortgage payments, they are well be falling behind on upkeep as well, and certainly major repairs are not happening. Homeowners may even remove appliances and fixtures to sell prior to foreclosure, and there may be deliberate vandalism.

Hidden costs

Along with unforeseen repair and renovation work, delinquencies such as back taxes and liens—which auction properties often have attached to them, either by the Internal Revenue Service (IRS) or state or other creditors—can add further costs to an otherwise desirable house. Whatever is owed, the government must first be paid and settled before the buying process can go forward. This applies mainly to properties being auctioned off; a bank will always pay off any liens attached to the property before reselling it to another party.

Where do I find foreclosures? The best way to look for foreclosed properties is to look at the same sites you look at for other real estate investments like realtor.com. They are sometimes super low priced and are offered up for bidding on sites like you.

Sites like hubzu.com and auction.com. Thinking about bidding? Give me a call.