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Full-time real estate investor Jerry Norton defines it as when a borrower defaults on a loan, the legal process for the lender to take possession is foreclosure. Then they can sell the property to recover some or all of the amount they own on the loan. Foreclosed homes are available virtually in every market across the country, providing opportunities for investors.
It’s important to remember that even though a borrower may default on his loan, lenders must legally follow specific steps and procedures to foreclose. While there are some variations from state to state, there are normally six phases of a foreclosure procedure. Let’s discuss each in the next section.
Six Phases of Foreclosure
Phase 1: Missed First Payment
The first phase is when the borrower misses his first payment. Normally there is a grace period of fifteen days to still make a payment on time. After that, the lender will send the borrower a warning for the first missed payment. Furthermore, the lender will send a demand letter if the borrower misses the second payment method as well.
The demand letters say that the borrower has thirty days to catch up on late payments, or they will take further action. This phase is also known as the pre-preforeclosure. The challenge is that it is difficult to find these sellers due to a lack of recording. Moreover, the motivation to sell isn’t high as it is very early in the process.
Phase 2: Happens After Three-Four Months of Missed Payments
In this phase, the lender will send the borrower a notice of default or N.O.D. In some states, the N.O.D. is recorded, and now investors can obtain a list of those. In some places, N.O.Ds are placed on the home, and by now, the borrower is in pre-preforeclosure and is moving toward foreclosure.
Once the pre-preforeclosure is handed over to the lender’s department in the same county where the property is located. The lender typically gives the borrower another ninety days to set off the payments and late fees to reinstate the loan. For lenders, this is an effective time to contact sellers.
Phase 3: Bring a Notice of Trustee
When the borrower is still unable to pay the loan amount to date, the lender can move to the third phase. In this stage, the lender will record a notice of trustee in the country where the property is located. They must also publish a notice in the local newspaper for three weeks saying the property will be available for auction.
The owner’s name and all sorts of legal information are printed along with other necessary information like when and where the sale will take place. At this point, the owner can still regain their property by paying off the entire loan.
Phase 4: The Property Is up for Sale at Auctions
At this stage, the seller can start thinking about taking the property to auction for sale. The lender determines the opening bid price based on the amount of outstanding loan, unpaid taxes, and other costs associated with the property. The highest bidder at the auction is awarded the property.
Here is where an investor wins big, as they are getting the property at a discounted price. However, there are two major challenges for the investor. First, they can’t see the full condition of the property prior to the auction. The second challenge, which can be a demotivating factor for most investors, is that they have to pay the full amount at the auction.
Additionally, buyers need to know about the statutory right of redemption that exists in certain states. It means that after the foreclosure, if the homeowner can pay the bid price, taxes, and other costs to the buyer, they can redeem their property. However, the length of the redemption period varies from state to state.
Phase 5: Trustee’s Deed
The highest bidder will be provided with a trustee’s deed at the auction. They become the new owners of the property. However, if no one is willing to pay even the opening bid amount, which real estate experts say is common, then in this phase, the lender will take the property back.
The lender becomes the legal owner and can sell the property in a traditional manner. They can contact real estate investors, agents, or an asset manager. Such properties are often bank-owned/R.E.O.s. The lender will sell the property as per its current value.
Phase 6: Finally, an Eviction Notice
If the borrower is still occupying the property, the lender sends an eviction notice demanding them to vacate the premises as soon as possible. If they don’t do it on their own, the lender can get assistance from the local police and governing body and force them to leave the property.
Opportunities and Risks of the Foreclosure Market
Foreclosure homes allow investors and homebuyers to get a property below market value. And this becomes a pro for buyers as they can use that amount to customize the house and make it however they want.
Buying a home at an auction is risky. Firstly, the home may have a lean on it, which you can only find out after purchasing. Foreclosed houses have an extensive amount of repair to be done. Thirdly, another downside of buying a foreclosed property is unable to order an appraisal, so you have the risk of paying too much.
Is Buying a Foreclosed Property Worth It?
After knowing all the pros and cons of buying a foreclosed property, it depends on individual investors to decide if they really want a foreclosed home. Sellers at the auction expect bidders to pay off the entire amount in cash there and then, but that is impossible for most people. However, if you want to invest in a property in Dubai, then Top Luxury Property has some of the best deals on its site. You can check out various properties in the exclusive neighborhoods of Dubai.