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Pre-Foreclosure
• Notice of Intent (first 30 days) for the delinquent loan
• Notice of Default (another 30 days) for the 1st posting where foreclosure process begins
• Notice of Sale (90 days by law) with the 2nd posting and publishing
• Postponements of the foreclosure sale are common for a wide variety of reasons (debtor files bankruptcy, owner disputes debt, loan modification agreements, title issues, litigation, etc.)
Foreclosure Auction Sale
• Auction takes place in a public location (most often, at the courthouse steps).
• Bidders must have cash in hand to purchase a property (or a cashier’s check).
• Auctions can have multiple bidders or no bidders. In the past, lenders frequently tendered an opening bid on the total debt accrued.
• Consequently, lenders frequently submit the winning bid an overwhelming majority of the time. After acquisition at the foreclosure sale by the lender, it is considered an REO (real-estate owned) property.
• Effective Foreclosure Auctions helps lenders arrive at more marketable opening bid amounts to allow more successful bids coming in from 3rd parties.
Post Auction
• Properties sold at auctions become owned by the winning bidder.
• If bank submits the successful bid, they try to sell the REO asset in the market or as a “bank-owned” listing.
• Eviction proceedings commence. Many evictions involve a “cash for keys” option where the new owner pays the occupant a nominal fee for vacating.
• Once property is secured, the new owner makes any necessary improvements or property rehab.
If you are the successful bidder, you will need to sign checks over to the Trustee. Usually, after all sales are complete, the auctioneer will write you a receipt. All you have to do now is just answer how the title is going to be held. You’re essentially done. The Trustee can record the Trustee’s Deed for you or they will send you the deed along with any excess funds from your checks. Sales are sometimes invalidated for various legal reasons. If they are, you will receive your funds back. You could realistically expect to have everything done about one to two weeks after the sale.
With the exception of smaller lenders, most lenders in today’s environment do not originate and service their own loans. Most loans today are originated by one lender, using guidelines provided by the institution to whom they would like to sell the loan. Then the loan (promissory note) is sold to that secondary lender who will continue to service the loan, meaning collecting monthly payments, maintaining any escrow accounts for property insurance and property taxes, and interacting with the borrower regarding their loan account. It is very common with mortgage loans for the loan to be originated with one lender, the note serviced by a different lender, and ownership of the note held by a third lender or financial institution. While the servicing lender is, for most intents and purposes, the foreclosing lender, their procedures for completing the foreclosure and handling the property post-foreclosure will be dictated by the institution owning the note.
When a person is seeking a loan to purchase a home, the lender will usually require some down payment to make sure the borrower has something “at stake” in case the borrower runs into some financial difficulty and stops making timely payments. Many years ago, 20% of the purchase price of the property was considered a normal down payment, the acceptance of government backed securities and mortgage insurance companies has reduced this down payment requirement to as little as 3% of the property purchase price required as down payment, or in some very good credit cases even 0% down. However, as seen with the current financial crisis, very low down payments (coupled with a lack of income verification) have produced enormous spikes in delinquent/defaulting loans.
Judicial Foreclosures
Judicial foreclosures are processed through the courts, beginning
with the lender filing a complaint and recording a notice of Lis
Pendens. The complaint will state what the debt is, and
why the default should allow the lender to foreclose and take
the property given as security. The homeowner will be served
notice of the complaint, either by mailing, direct service, or
publication of the notice, and will have the opportunity to be
heard before the court. If the court finds the debt valid,
and in default, it will issue a judgment for the total amount
owed, including the costs of the foreclosure process. After
the judgment has been entered, a writ will be issued by the court
authorizing a sheriff’s sale. The sheriff’s
sale is an auction, open to anyone, and is held in a public place,
most often, it is held in front of the courthouse steps; it can
also be held in front of the property being auctioned. Sheriff’s
sales will require either cash to be paid at the time of sale,
or a substantial deposit, with the balance paid anytime from later
that same day up to 30 days after the sale. Check your local
procedures carefully. At the end of the auction, the highest
bidder will be the owner of the property, subject to the court’s
confirmation of the sale. After the court has confirmed
the sale, a sheriff’s deed will be prepared and delivered
to the highest bidder, when that deed is recorded, the highest
bidder is the owner of the property.
Non-Judicial Foreclosures
Non-judicial foreclosures are processed without court intervention,
with the requirements for the foreclosure established by state
statutes. When a loan default occurs, the homeowner will
be mailed a default letter, and in many states, a Notice of Default
will be recorded at approximately the same time. If the
homeowner does not cure the default, a Notice of Sale will be
mailed to the homeowner, posted in public places, recorded at
the county recorder’s office, and published in area legal
publications. After the legally required time period has
expired, a public auction will be held, with the highest bidder
becoming the owner of the property, subject to their receipt and
recordation of the deed. Auctions of non-judicial foreclosures
will generally require cash, or cash equivalent at the sale.
It is important to note that each non-judicial foreclosure state has different procedures. Some do not require a Notice of Default, but start with a Notice of Sale. Others require only the publication of the Notice of Sale to announce the sale, with non direct owner notification required. You need to know the specific procedure for your respective state.
All information provided is for reference only and not intended to provide legal or business advice. Please seek independent advice from professionals before making any purchases or investments.
A listing of judicial procedures for each respective state are available here.