Thinking of investing in a distressed property? It’s helpful to understand the foreclosure process and the buying opportunities to be found along each step of the way:
Missed payment or default. When a homeowner misses at least one mortgage payment, they are in a stage called default. In this stage, a homeowner may try for a short sale, in which a lender allows a property to be sold even though the selling price doesn’t fully cover the mortgage obligations. A short sale can be a great way to purchase a property in good condition at a significant discount. But in some cases, the homeowner isn’t sure they really want a short sale and may be trying to work with the bank to modify the terms of their loan so they can keep their home. Banks can take a long time to respond to offers. This can make buying a home in this phase uncertain, difficult, and time-consuming.
Notice of default or pre-foreclosure. After three months of missed payments, a notice of default, or NOD, is issued. This stage is called pre-foreclosure. Though a short sale is still a possibility, it will depend on the bank that takes a loss on the loan. Some lenders would rather sell a property via short sale than proceed with foreclosure.
Trustee’s sale or public auction. If the homeowner hasn’t been able to work things out with their lender or arrange for a short sale, the next step is a trustee’s sale. This is where the property is offered for sale via public auction. Some investors like to purchase homes at auction because of the big discounts. But buying homes this way can be tricky. For example, the trustee may or may not allow you to inspect the property. And if you’re interested in auctions because you’ve heard you can pick up homes for pennies on the dollar, that isn’t likely to happen either. The trustee typically starts the bidding at a certain price. As with homes sold through traditional means, some deals are better than others.
Real estate owned or bank repo. If a property doesn’t sell at public auction, the lender will take it back and typically sell it through traditional means with a realtor. At this stage a property may be called an “REO”, short for real estate owned, or “bank owned,” a bank repo or simply a foreclosure or post-foreclosure. They all mean the same thing. Properties in this stage are typically sold “as-is,” meaning most banks aren’t interested in fixing anything or offering repair allowances. Sometimes the property is priced higher than the minimum it was offered for at auction; other times the bank puts it up for sale for less. In any event, a thorough inspection of the property is a must; but you probably have to act fast because a lot of REOs get multiple offers these days.
As you can see, there are opportunities in each stage of the foreclosure process. Getting to know each stage may just help you find the deal you’re looking for.
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