The foreclosure process has been around for some time, but lately it seems that it has become the new “it” term in real estate. Unfortunately, when the economy takes a turn for the worse, foreclosure seems to rear its ugly head. Foreclosures can be good, or bad, depending on which side of the foreclosure you’re on. If you’re the homeowner or lender, the process is time consuming, costly, and has lasting effects. A foreclosure on a homeowner’s credit will have an impact upwards of ten years, not to mention loss of equity, and lack of housing. The lender will typically sell the property at auction, usually for a loss. If foreclosures are detrimental for the homeowner and most likely the lenders, then who reaps the benefits? Those who want to buy a foreclosure. As the unemployment rate continues to rise, so does the number of homes in foreclosure, allowing potential buyers to pick and choose the foreclosure that’s right for them.
The Homeowner’s Side
When a homeowner is unable to make payments on their loan, it becomes known as a defaulted loan. It is necessary for the lender to recover the amount owed on the defaulted loan by selling or taking ownership of the property. The specifics of the foreclosure process can vary from state to state, but there are four basic stages that are consistent.
- After about three to six months of missed payments, the lender orders a trustee to record a Notice of Default. This puts the borrower on notice that he or she is facing foreclosure and starts a reinstatement period, also known as pre-foreclosure, that typically runs until five days before the home is auctioned off.
- The homeowner can sell the property to a third party during the pre-foreclosure period. The sale allows the homeowner to pay off the loan, and avoids having a foreclosure on his or her credit history. If the default isn’t corrected within three months, a foreclosure sale date is established. The homeowner will receive a Notice of Sale, and this notice will also be posted on the property. In addition, the Notice of Sale is recorded at the County Recorder’s Office in the county where the property is located. Finally, over a three-week period, this Notice of Sale is also published in newspapers local to the county in question.
- A third party buys the property at a public auction at the end of the pre-foreclosure period. The auction typically occurs on the steps of the county courthouse, in which the property is located. The time and location of this sale are designated in the Notice of Sale. The property is auctioned in public to the highest bidder, who must pay the high bid price in cash, typically with a deposit up front and the remainder due within 24 hours.
- If the property isn’t sold at auction, the lender takes ownership of the property, usually with the intent to re-sell it. The lender can take ownership either through an agreement with the homeowner during pre-foreclosure, a short sale foreclosure, or by buying back the property at the public auction.
The Buyer’s Side
There are three stages that a potential buyer can buy a home in foreclosure.
- Pre-Foreclosure: Buying a property in pre-foreclosure involves approaching the homeowner and offering to buy the property outright. The homeowner can possibly walk away with something to show for any equity in the property and most importantly avoid a bad mark on his or her credit history. The buyer has time to research the title, condition of the property, and can realize discounts of 20-40 percent below market value.
- Auction: If the defaulted loan is not reinstated by the end of the pre-foreclosure period, potential buyers can bid on the property at a public auction. At auction, an opening bid on the property is set by the foreclosing lender. This opening bid is usually equal to the outstanding loan balance, interest accrued, and any additional fees and attorney fees associated with the sale. If there are no bids higher than the opening bid, the property will be purchased by the attorney conducting the sale for the lender, and will be considered bank-owned. Buyers often are required to pay in cash at the auction and may not have much time to research the title or condition of the property beforehand. Public auctions offer some of the best bargains and potential buyers avoid the unpredictability of dealing directly with the homeowner.
- Bank-owned: If the lender takes ownership of the property, either through an agreement with the owner during pre-foreclosure, or at the public auction, the lender will usually want to re-sell the property to recover the unpaid loan amount. The lender will then typically clear the title and perform needed maintenance and repair. Thus, the potential bargain for bank-owned home is typically less than a pre-foreclosure or auction property.
Purchasing a home during the foreclosure process can certainly be more of a hassle than buying a home in the traditional manner, but the payoff is buying a home with built-in equity. It should be mentioned that real estate agents can provide assistance with foreclosure properties, through their vast network of listed homes, agents can narrow down the properties that are either in the pre-foreclosure or foreclosure state.
The foreclosure process is not an ideal situation for the homeowner or lender, but can be unavoidable in certain situations. If the process must proceed, knowing the steps to a foreclosure can bring some relief of knowing what lies ahead, while understanding the steps can aid potential buyers in getting a better deal.
Josh Anderson is a Realtor with Keller Williams Realty in Nashville TN. If you have any questions about the real estate market, please call (615) 509-7000, email Josh@JoshAndersonRealEstate.com, or visit www.JoshAndersonRealEstate.com.