Knowing the Basics of Foreclosure Law
If you are a buyer interested in purchasing a foreclosure home, then prepare to invest time and energy in understanding and navigating the foreclosure process. Why? Because not only will you better understand how to avoid the potential pitfalls that could cost you money, but you may find opportunities for negotiating a good deal.
Foreclosure laws are state driven. In other words, each state has their own set of laws and regulations governing the foreclosure process. The path to foreclosure is either a judicial (goes through the courts) or non-judicial one; however, a few states offer both options. Generally, a mortgage involves a judicial and a deed of trust allows for a non-judicial proceeding. It is also important to note that many mortgages include clauses that will allow the lender to sell the property in the event of default without even going through the court process.
The Process
When a homeowner has stopped making payments on their loan, the lender considers them to be in default. They begin foreclosure. The first step in foreclosure is to send a summons to the borrower notifying them of the lenders intent to foreclose. This is called Lis Pendens. The lender’s attorney will also file notice and the appropriate documents with the city clerk regarding intent to foreclose. The information filed with the county clerk becomes a matter of public record and is published in the local papers. These listings provide a good research starting point for buyers interested in finding foreclosure listings.
After the filing of the Lis Pendens, the homeowner still has time in which to either pay the past-due balance to bring their loan current or to negotiate some type of settlement with the lender. If this fails to occur and the waiting period expires, the court hears the lender’s claim and will issue an order allowing the foreclosure. Then, a legal notice of when the foreclosure sale will take place is published in the local papers.
The homeowner can still attempt to make payment arrangements or reach a settlement with the lender even after the court has ordered the foreclosure. If that doesn’t occur, the house is sold at auction to the highest bidder. In many instance, the original lender or bank is the party that purchases the property. They in turn will then choose to either sell the property on the open market through a realtor or possibly hold their own auction.
Most foreclosure listings are real-estate owned, which means the properties are owned by banks or lenders. These provide the safest buying opportunities for buyers interested in foreclosure homes. These types of properties generally offer little to no risk, no worries regarding outstanding property or tax liens, and you often do not have to worry about evicting people from the home. The lenders have already handled those things. Additionally, lenders are open to negotiating below market rates and lower than usual down payments with interested parties.
If you are new to buying foreclosures, then lender or bank foreclosures may be the best way to go. However, if you do your homework, you can also find bargains on your own. For example, making an offer to an owner during the pre-foreclosure period may prove beneficial for all. The owner, not wanting to loose all the equity in their home, may be motivated to accept an offer that gives them a portion of the difference between the equity in the home and its market value.
A buyer can also purchase a home at the foreclosure auction. While you may be able to secure a home well below market value, there are significant risks to note. First, you probably will not be able to inspect the property prior to bidding, so you probably won‘t know the condition of the home. Secondly, you are expected to pay the entire purchase price the same day as auction. Finally, if the homeowner is still living in the home, it becomes your responsibility to evict them and that can take anywhere from ten weeks to six months, depending on state law.
As with all things in life, there are notable pros and cons to buying a foreclosure home. Regardless if you choose to negotiate directly with an owner or work from foreclosure listings provided by various internet websites or banks, understanding the foreclosure process and applicable state laws is a must. This knowledge will allow you to make an informed decision and make a reasonable offer that will hopefully prove acceptable to all involved.