With the bursting of the housing bubble in recent years, foreclosures and short sales have become quite commonplace in the real estate market. During the early part of my real estate career, I became very familiar with the foreclosure process, and invested in several foreclsoure properties. I know far more about it than most brokers. A thorough knowedge of this process is a must for those interested in investing in a foreclosure via one of the many opportunities that forecosure market presents. Here is how the process works.
Mortgages contain legal language that describes a judicial process the lender must use to foreclose, a process that can be expensive and time consuming. Many states use mortgages. California is a “trust deed” state – most home loans in California are secured with trust deeds. Trust deeds contain a “power of sale clause,” which allow for a “non-judicial” foreclosure, meaning that the foreclosure can be completed without court action. Trust deed foreclosures do not require attorneys, are less expensive, and take less time to complete than judicial foreclosures. The balance of this discussion will refer to foreclosures using the power of sale in the deed of trust.
There are three parties specified in a deed of trust – the trustor (the borrower), the beneficiary (the lender), and the trustee, an independent third party who has the responsibility to handle the foreclosure should the trustor default on the loan and the beneficiary decide to foreclose.
There are three basic stages of the foreclosure process. First is the initial stage, also known as the ‘pre-foreclosure stage’ which begins with the trustee recording a Notice of Default. The beneficiary instructs the trustee to record this document after the trustor has missed payments, and, in the current foreclosure climate, after the beneficiary has made repeated attempts to get the trustor to bring the loan current.
If, after 90 days, the trustor has not brought the loan current by paying all missed payments and costs, the lender may instruct the trustee to schedule the trustee sale (the auction). This is done by recording a Notice of Sale, which sets the date, time, and location of the sale, and states an estimate of the total amount that will be due to fully pay off the loan and trustee’s fees. During the foreclosure process, the beneficiary is not allowed to accept any partial payments towards the amount due, unless they wish to cancel the foreclosure proceeding and start it over again.
The final stage of the foreclosure is the sale itself. The sale cannot be held until certain notifications have been made to all parties involved and the sale has been published in legal publications, a process that usually takes from three to four weeks. Before the sale, the beneficiary informs the trustee of the amount of the opening bid. This amount can be no greater that the total principal, interest, costs, and trustee’s fees owed. The lender can, however, open the bidding at less than the amount owed, and often does so to encourage bidding. This is especially true when the amount owed is greater than the property is worth, which is very common in today’s market.
The highest bidder at the sale takes title to the property, subject to any liens senior to the foreclosing lien. It is important to note here that, while the property is in foreclosure, it is the lien that is being foreclosed on. More than one foreclosure can be in progress on a property at the same time – in the current market this is often, if not usually, the case. Each lender holding a position secured by a deed of trust (or other valid lien) must complete its own foreclosure independently from any other. When the foreclosing beneficiary is the senior (first) loan, junior loans are eliminated upon completion of the foreclosure. When the foreclosing beneficiary is a junior loan, all loans or other liens senior to it remain in place upon completion of the foreclosure, and must be satisfied to be removed from title.
If there are no bids at the sale, title to the property reverts to the foreclosing beneficiary (the bank). The property then becomes what is known as an REO, which stands for Real Estate Owned (this term comes from the banks’ balance sheet). The above rules regarding lien seniority apply to the bank as well.
Most people who want to learn about the foreclosure process are interested in knowing how they can acquire a property in foreclosure. Each of the three foreclosure stages provides a possible buyer with acquisition opportunities and strategies. I have personally acquired foreclosures during each of the three stages, and have developed some successful strategies and made some very good buys. I would be happy give you more information and answer any questions you may have about foreclosures.
–Brian Cassingham, Broker, Twin Palms Realty