A foreclosure occurs when a property owner cannot make principal and/or interest payments on his/her loan, typically leading to the property being seized and sold. Foreclosure is a legal process in which the rights to a property are taken away from the owner and the property is then sold to satisfy unpaid mortgages and liens against the property.
Stages of a Foreclosure
The foreclosure process is not very difficult to understand. There are several stages during which the homeowner can even avoid a foreclosure. (For more information on avoiding a foreclosure click here.)
First, a notice will be sent to you regarding your account being behind and the dollar amount needed to bring your loan current. After a certain period of time, if the payments are not brought current, your lender will request that a Notice of Default be filed by the Trustee at the County Recorders Office in the county in which the property is located. This puts the borrower on notice that he or she is facing foreclosure and starts a reinstatement period that typically runs until five days before the home is auctioned off.
If the default is not corrected (payments must be brought current) within three months, a foreclosure sale date is established. The homeowner will then 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. This office is located in the county where the property is located. This foreclosure or notice of sale will also be published in the local newspaper.
A Trustee's Sale is a public auction that is open to all bidders and the property is usually awarded to the highest bidder who meets all the criteria set by the Trustee. A Trustee is an individual or company chosen to administer the assets of the beneficiary and facilitate the foreclosure process.
Time and Location
The time and location of this sale are designated in the Notice of Sale. At the Trustee 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 within 24 hours. The winner of the auction will then receive the trustee’s deed to the property.
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 Trustee 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.
If this occurs, and the opening bid is not met, the property is deemed a REO or Real Estate Owned. This typically occurs because many of the properties up for sale at foreclosure auctions are worth less than the total amount owed to the bank or lender.
When you purchase property at a foreclosure sale, all junior liens other than property taxes are wiped out. Priority of liens is determined by the date of recording. When you purchase a REO a/k/a. Bank Real Estate Owned; you will typically receive the property with a clean title.
Clearly, if you are in the market to buy a home, looking at foreclosures is a sensible thing to do. However, there are certain steps and precautions that you have to take when buying a home in foreclosure. (To see step to buying a foreclosure click here.)