The Foreclosure Process

The basics of process In a Mortgage state:

• The mortgage is used as the security instrument.
• The owner borrows money from a lender.
• The property is then used as collateral for the loan.
• The deed is held by the owner.

In the event the owner becomes delinquent in making the monthly payments, the lender must file a notice of suit to begin the foreclosure action. The owner has every opportunity to bring the loan uptodate. If the owner does not make the loan current, a Court of Law can rule in favor of the Lender. Then a time is set for the property to be auctioned. Typically this is referred to as a Sheriff’s sale. Lawsuits are a matter of public record and available to everyone. Foreclosures are filed with the Circuit Court Clerk. They can be tracked by using the case number to locate and review the file. Once you have reviewed several files, it becomes easier. Deeds, mortgage information, and similar documents can also be found in the Land Records Office. Within these files you can determine if there are any liens, judgments or other encumbrances recorded against the property. In a Deed of Trust state: The Deed of Trust is the security instrument in a Deed of Trust State. These are the parties involved: the Owner, the Lender or beneficiary, and the Trustee (usually an attorney). The property’s title remains the possession of the Trustee. If the owner becomes delinquent, the Trustee is notified by the Lender and must record a Notice of Default at the courthouse. This varies by state. Some may not require the filing of a Notice of Default. This is a nonjudicial method; thus no lawsuit needs to be filed. After the mandated period of public notice, the property may be auctioned. Public notice is normally required in both the Mortgage or Deed of Trust State. In the United States there are approximately 12 ways to foreclose on a real estate property. Each state has its own procedure and method of execution. They fall into the following major groups:

1. Trust Deed Lien and Power of Sale
2. Trust Mortgage Title and Power of Sale
3. Mortgage Lien and Judicial
4. Mortgage Lien and Power of Sale
5. Trust Deed Intermediate and Power of Sale
6. Mortgage Intermediate and Power of Sale
7. Mortgage Intermediate and Judicial
8. Mortgage Intermediate Strict Foreclosure
9. Security Deed and Power of Sale
10. Mortgage Title Entry and Possession
11. Trust Deed Lien Judicial
12. Mortgage Title Judicial

Each state has a specific system – a step by step process for the lender and the owner to follow in the foreclosure process. It is a good idea to understand the specifics of your state’s process and the minor nuances. How the Property is Held Generally, real estate is secured by either a debt or a lien often called title theory or lien theory. Title theory states classify the mortgages or deeds of trust for properties as contracts and contract law applies. The contract conveys the title to the property secured by the underlying debt. In lien theory states, the mortgage or deed of trust is a lien against the property. A lien just means an entitle (usually a bank) has a claim or hold on a property as security for a debt. Liens are encumbrance to the property and recorded against the property. You may have more than just one lien (debt) against a particular property. How Property is Foreclosed On The lender follows a specific system of foreclosure to repossess the property or rectify the satisfaction of the debt. The states are split approximately 50/50 on the process. First there is Power of Sale. A good portion of the trust deed states use Power of Sale. Power of Sale tends to be a less expensive and quicker way to foreclose on the property. Under Power of Sale, the lender (trustee) informs the property owner the debt has not been paid and specifies a due date. In a few weeks, if the payment has not been processed a stronger demand for the payment is issued, often an immediate demand for payment. States regulate the period of time prior to public auction, which is approximately four weeks. The process is sometimes complicated by FHA and VA properties. These properties are guaranteed by the federal government through their respective programs. The programs have their own regulations and procedures for rectifying the debt obligation and listing of the properties. A deeper understanding of the FHA and VA process is encouraged. There are some outstanding opportunities in the FHA and VA foreclosure market. Contact your local branch office for more information. FHA: http://www.hud.gov/ VA: http://www.va.gov/ Judicial Foreclosure governed by the courts accounts for the other half of our nation’s foreclosures. Note that Power of Sale states usually have some form of judicial procedure. Although slightly different in approach, both systems have essentially seven steps:

1. NonPayment. From time to time we all may be a little late on our mortgage payments. The penalty for being two weeks late may be a $10 to $20 late fee and perhaps a mention on our credit report. Beyond two weeks the lender starts to get a little anxious. They may let a month slide with notice of nonpayment, but very quickly they begin to take the nonpayment seriously. The second month they will send notification of past due and approximately six to eight weeks after the nonpayment you can expect the phone to start ringing. The lender will try to solve the problem and work out a plan for repayment.
2. Default. If payments continue to go unpaid the note is moved to default setting. Legal action is initiated. There is a demand letter asking for full and immediate restitution of the debt owed or the attorneys will file suit to foreclose.
3. Complaint. This lists the events that took place to force foreclosure. A detailed listing of the mortgage amounts owed, time frame of nonpayment, listing of the parties and property, a complete history of the mortgage and reference to the official documents. At this point the note is accelerated. The entire amount of the mortgage and related costs is due.
4. Lis Pendens. After default a Lis Pendens (legal notice) is filed against the property. The Lis Pendens will include the following: case number *****igned by the court, lender (plaintiff), owner(s) (defendants), property, legal description, notice of foreclosure and the attorney for the plaintiff.
5. Judgment. Final judgment occurs after a set period of time determined by the laws of the state. The defendant can still rectify the situation by paying the default. All fees have to be paid, including nonpayment court fees and legal costs. This does not mean negotiations cannot happen by the owner or an investor. The lender will file a motion for judgment. When final judgment is granted the plaintiff has the right to sell the property.
6. Sale. After judgment, the motion of sale is put into action. An order for the sale is processed and a specific date for public auction is set.
7. Redemption Period. The process of foreclosure can take anywhere from three months to a year from start to sale. Note that during this time the legal fees and costs are escalating and being attached to the property. However, an investor can acquire the property at any point during this period. Obviously, sooner would be favorable to later due to less legal expenses and mounting costs. It changes by state, but generally, investors can intervene up to the day of the sale. On the day of the sale a bidding war can erupt.

Visit The Courthouse The sale of the property, auction or foreclosure takes place at the courthouse. The foreclosure process is threatening to the property owner and occasionally concerns may rise for the lender, but these should not scare you at all. The process is a systematic and follows well defined guidelines. At regular times of the day and week the court auctions off the property (the sale). The scheduled times can be found out by simply calling the office and asking the trustee. You have probably heard the statement that the property was sold at the courthouse steps. In fact, it probably was sold in the lobby, foyer or a specified location. A typical procedure (sale) would involve:

• A scheduled time for properties to be sold;
• A trustee making an announcement of file case numbers and their status (solved, available, etc.);
• A trustee listing the case and/or property description and asking for bids;
• Bidding starts; and
• The property is bought and paid for at the courthouse.

Note the property will usually have at least one bidder. The lender wants to ensure the property is sold for at least what is owed on the property. Therefore, the lender or their designate starts the bidding at the amount being foreclosed on. If that is the only bid, the auction is over. The lender will actually receive the money so there is no real cost. There have been the occasional errors where the lender did not protect their debt and a bidder other than the lender received the property for a song. If there are multiple bidders the process can be quite entertaining. I suggest very strongly that you go and visit the courthouse and watch several auctions. You will learn a lot about the process. You may even try to get to know some of the other individuals at the foreclosure. Lawyers, agents, banks, title company representatives, other investors and more will sometimes be in attendance. They are all excellent contacts for the investor. If you already own a property, check the documents while you are at the courthouse. Simply ask the court clerks. It will be helpful if you have the legal description of the property. Get it from your mortgage documents. You can also review the bulletin boards in the offices and pick up any publications and notices in those offices. Be sure to check notice of trustee / sheriff sales for your county. Foreclosures offer a lot of opportunity for profit. Certainly you can buy a property during the foreclosure process prior to sale at a discount. There is opportunity for great deals and negotiations as the foreclosure clock is counting down to the sale. Following below are a couple of examples:

1. Joint venture with the owner. The owner may have had a temporary set back. They could have a substantial amount of equity in the property. Perhaps you can approach them to help solve their current problem, get their payments back on track and save their personal credit profile. In return, you might agree to take a 50% ownership of the property. Alternatively, you could agree to sell the property get cash out for both you and the owner. In this case you would want to get to the owner early in the foreclosure process.
2. Look for properties with substantial equity. Usually the lender is going to make a bid just over the loan value to ensure the debt is paid. However the property may have a lot of equity. Therefore, you can pick the property up for a major discount and resell the property.
3. Approach the successful auction winner and inquire if they would like to sell the property.