Sell your position in the property to another lienholder. If you control the first mortgage, for example, you can sell it at a markup to a construction company that has a lien against the property so that the company can protect its interest in the property; otherwise, it risks losing all the money it’s owed. (See Chapter 19.)
Chapter 2
Getting Up to Speed on the Foreclosure Process
IN THIS CHAPTER
A common foreclosure myth is that it’s a one-time event. Homeowners miss a mortgage payment or two, and the lender swoops in and scoops up the property. The fact is that foreclosure is typically a long, drawn-out legal process that begins with missed payments, proceeds through some sort of legal system, and often results in homeowners losing their homes.
An understanding of the foreclosure process reveals the various stages at which you can purchase properties. By knowing what to expect, you can often maximize your opportunities while minimizing costly mistakes.
This chapter provides a road map of the foreclosure process, beginning with a notice to the homeowners and the public of missed mortgage payments and ending with the homeowners relinquishing possession of the property. Anywhere along the way, the homeowners have options to interrupt the process and regain control of the property. I point out these opportunities to help you better assist homeowners in making choices and to warn you about what homeowners can do to derail your plans.
Identifying the Foreclosure Process in Your Area
The end result of foreclosure is that the homeowners lose ownership and ultimately lose possession of their property. That’s true no matter where you’re buying foreclosure properties. But different states and counties follow different foreclosure procedures. The two main procedures are
Foreclosure by trustee sale, also referred to as foreclosure by advertisement
Foreclosure by judicial sale, also referred to as judicial foreclosure
The following sections describe these two types of foreclosure. To find out which process your state follows, check the appendix at the back of this book. Counties may also have their own local rules for how the sale is carried out, so visit your county courthouse (the Register of Deeds office), and ask for an explanation of the rules and regulations. I also recommend that you sit in on a few auctions before bidding on anything.
Foreclosure by trustee sale
A few more than half the states follow the trustee-sale route. When the homeowners purchase a property in one of these states, the county issues a sheriff’s deed that the trustee (which may be the sheriff in some areas) holds in trust until the mortgage is paid in full. After paying off the mortgage, the trustee releases the deed to the homeowners.
If the homeowners default on the payment, the lender can notify the trustee to initiate foreclosure proceedings. Then the trustee can sell the property and transfer the proceeds to the lender as payment of the loan. Because the foreclosure doesn’t need to progress through the courts, foreclosure by trustee sale is typically much faster than foreclosure by judicial sale.
Foreclosure by judicial sale
Fewer than half the states follow a judicial foreclosure process. As the name implies, judicial foreclosure passes through the justice system: the state (circuit) or district court. When the homeowners default on their mortgage, the lender files a claim to recover the unpaid balance of the loan from the borrowers. The courts decide the case, which usually takes a long time to resolve — typically four to six months, but sometimes up to a year. During this time, unless the homeowners work out a payment plan or some other solution with the lender, they’re almost guaranteed to lose their home.
Exploring the Missed-Payment Notice Stage
Some lenders initiate foreclosure proceedings as soon as the homeowners miss one or two payments. Other lenders start sending reminder notices, often following a predictable timeline:
Two-week notice: Some lenders give homeowners a two-week grace period, after which they begin to start calling the homeowners or sending them letters.
30-day notice: When a payment is so late that it’s time for the next payment, the lender gets a little jittery and ramps up its efforts. The lender may even begin levying late-payment fees.
45-to-60 days' notice: Unless the homeowners contact the lender and work out some new payment agreement, the lender typically sends out a certified letter insisting that the homeowners pay up.
90-day limit: If the homeowners still haven’t contacted the lender or shown any commitment to make good on the loan, the lender typically initiates formal foreclosure proceedings. At this point, the lender transfers the matter to outside legal counsel (an attorney), and the attorney in charge posts a foreclosure notice, sometimes referred to as a Notice of Default (NOD). As soon as the attorney starts foreclosure by advertisement, these legal notices or advertisements begin to attract investors.
Getting Serious: The Notice of Default
For investors, the foreclosure process officially kicks off with the posting of the NOD or foreclosure notice in the county's legal newspaper or the local newspaper — private, for-profit publications that get the word out to prospective bidders. At this point, distressed homeowners usually realize the inevitability of losing their property. Some remain in denial; others become resigned to the fact, even though they may have several options to abort the foreclosure process and regain control of their property … and their finances.