As a real estate consultant, I often get asked questions about foreclosures, especially as the number of these distressed properties skyrockets. According to a recent RealtyTrac press release, there were a total of 176,137 foreclosure filings in May of this year, a 19 percent increase from the previous month and up nearly 90 percent from May 2006.
Purchasing a foreclosure property is a little-understood process, so I thought I would help by explaining a bit about them, and answering a few of the most commonly-asked questions I get.
The very first question I can answer is,
Q: What is a foreclosure?
A: Foreclosure is the process by which a lender or creditor can recover an amount of money owed on a loan which is secured by real property (the house) that is in default. The process starts when a borrower/owner does not pay their bills for a period of time, and the lender files a public notice with the County Recorder’s Office, called a “Notice of Default” (NOD). The borrower has a grace period, called ”Pre-Foreclosure” during which they can bring their account current. If they do not, or the property is not sold to a third-party during this time, the lender then files a second notice with the County, called the “Notice of Trustee’s Sale” (NOT), which describes their intent to sell the property at public auction, usually on the County Courthouse steps. If the property does not sell to the highest bidder at the public auction, then it goes back to the lender, and becomes what is known as “bank-owned property” or an REO, which stands for “Real Esate Owned (by the bank).” When the bank gets the property back, they list it on the open market through the Multiple Listing Service (MLS) with their team of Realtors they specifically use to list these types of properties.
So to recap, the three categories of “foreclosures” are:
- Pre-Foreclosure. Begins when the NOD is filed.
- Foreclosure sold at auction. This is the Trustee’s Sale.
- Bank-owned property (REO). Begins when the property reverts to bank ownership.
Q: How do I find a foreclosure?
A: There are several ways to find foreclosures:
If you are looking for pre-foreclosure properties, the most obvious way is to check with the County Recorder’s office. Since these filings are made public, you have access to them. Simply go down to the recorder’s office and ask to see this week’s filings. Or, you can subscribe to my weekly distribution list of pre-focreclosures (NODs and NOTs) in Santa Clara County, which will update you every Wednesday when the county publishes the new pre-foreclosure filings.
If you are looking for Trustee’s Sale auctions, they are published in the newspaper on a weekly basis under “public notices.” Notices are also posted at the entrance to the courthouse in the County or City where the home is located.
If you are looking for bank-owned properties (REOs), you can also check sites like RealtyTrac. You can also go directly to the major banks, like Wells Fargo, Bank of America, Washington Mutual, etc., and ask to see their list of REO properties for sale.
Q: How do I buy a pre-foreclosure?
A: Pre-foreclosures are not technically “for sale.” These are simply homeowners who are having difficulties paying their bills. They may be experiencing financial difficulties, medical problems, having family troubles such as divorce, job loss, or any other myriad of problems people have paying their bills. Buying a property in pre-foreclosure involves approaching the borrower/owner directly and offering to buy the property outright. You would likely offer the owner a price that pays off the obligation (allowing them to avoid the bad mark on their credit), plus some extra money so they can walk away with something to show for any equity in the property. You will have time to research the title and condition of the property during this process. If researched thoroughly, you may be able to get these properties at discounts of 25-50% below market value.
Q: How do I buy a property at auction?
A: Simply go down to the County courthouse steps at the pre-determined auction time.
Q: Should I have financing arranged before the auction?
A: California state law say that you need to have enough liquid funds to buy the home when your bid is accepted. The Trustee will accept cash or cashier’s checks, that’s it. So, you need to have enough money to buy the home at the final bid price, right there, at the auction, on the spot. Many buyers will have several denominations of cashier’s checks with them, $100,000 each for example, up to the amount they are willing to pay for the property they want to buy. If you have two $100,000 cashier’s checks, and the property ends up with a final bid of $150,000, the overage ($50,000) will be returned to you.
Q: Why is the auction price listed so low?
A: The price listed is the principal loan amount plus back payments and foreclosure costs incurred by the foreclosing lender, it is NOT the asking price of the home. Sometimes, this lender may be a second mortgage, and that amount is typically far less than the first mortgage. Foreclosure of the 2nd mortgage is always subject to the covenants of the first mortgage (meaning that the 1st mortgage must be paid off too.)
Q: Can I preview forclosures before I bid on them?
A: If the property is listed on the open market (through the MLS), or as a For Sale By Owner (FSBO), then yes. If it isn’t, then probably not. All foreclosure sales are “As-Is”… buyer beware!
Q: Do I need a Realtor® to attend the auction?
A: Whether you are buying a pre-focreclosure from the owner directly, bidding on a property at auction, or purchasing an REO property from the bank, I recommend having professional buyer representation. Everyone’s situation is different, and due to the fact that you are entering into a legally binding contract, it’s always a good idea to have a skilled consultant give you help and guidance along the way.
If you have any more questions about the foreclosure process, please feel free to contact me!
Tags: Real estate
Possibly related posts
16 responses so far ↓
1 Rob Beland // Jun 20, 2007 at 5:25 pm
Great information Bart…
One thing I’d like clarified is if a house is foreclosed and there is a second mortgage or a HELOC on the house, what happens to the second? Let’s say Bank 1 has the first mortgage and forecloses and bank 2 has a second mortgage or a home equity line, does bank 1 care about bank 2?
Another angle would be if I am buying a house at foreclosure and there is a second on it, if I satisfy the first mortgage at the auction is the bank with the second then going to come after me for the money?
A quick explanation would be greatly appreciated…
2 Bart Marchioni // Jun 21, 2007 at 1:36 pm
Hi Rob,
Thanks for the comment!
To answer your question, in California non-judicial foreclosures, if the 1st mortgage is the one foreclosing, and the property is bought at auction, all the subsequent liens (called Junior Liens) are wiped out. They have no recourse, and cannot come after the buyer of the property. The only exception is the Federal Government. If there is an IRS tax lien on the property, they have an additional 6 months to collect their money.
I hope that helps!
Best regards,
-Bart
3 Florida // Jun 25, 2007 at 8:42 am
Realty Trac has a 7 day trial
and is a good resource
4 isailthe7seas // Jul 11, 2007 at 7:37 pm
Hi Bart,
We are fixed term lease tenants, 1 month into our lease the house went into preforeclose. The NTS was posted today for 7/31 on the courthouse steps.
Now what happens to us???
Any suggestions, we can’t afford to buy this house as it is upside down with 3 loans.
5 Bart Marchioni // Jul 11, 2007 at 7:55 pm
As the tenants in a home that is being foreclosed on, you are pretty much out of luck if the property sells at auction. The new owner takes posession of the property and will decide what happens. You may be able to negotiate with the buyer of the house to keep the lease in force so you can stay. Alternatively, they may want to live in it themselves or perhaps improve the place and sell it. The other option is that it does not sell at auction because no one wants to take posession of a property which is upside down, and the bank takes it back and sells it on the MLS for what the market will bear (thereby taking a loss but recouping a majority of the balance owed on the mortgage). In either case the new owner will probably ask you to leave, unless you can negotiate with them to let you stay under a new lease agreement. (The old lease agreement was between you and the previous owner and would most likely be no longer valid, however you should consult your state and local tenants laws.)
I wish you the best of luck in the coming months, I know that it’s no fun to be on the receiving end of a foreclosure proceeding. If I can be of further assistance, please let me know.
-Bart
6 isailthe7seas // Jul 11, 2007 at 8:42 pm
Thanks for your quick response. We are in your area (Campbell) so I think I will head down to courthouse to see what happens and if someone buys it, introduce myself! We are the type of tenants that treat a home as if it was ours! Now if we could only get our security deposit back!
7 s. dOMINGUEZ // Aug 8, 2007 at 2:43 pm
Hi, home i’m renting just got forclosed on the bank owns it now. I am told I have 60 days to move. Question is how do I negotiate with the bank? What do I ask for? don’t want them to take advantage of me because I don’t have the adequate knowledge. How long can I stay? will apreciate any help you can give me and my kids.
Thanks,
S.D.
8 Stephanie // Aug 9, 2007 at 12:24 pm
I am living in a house that was on the foreclosure market but the homeowner is signing the house back over to the bank… I have 5 children ( ages 16-1) and truly no where else to go at this point and need to know what happens from here? Thank you for your response.
9 Bart Marchioni, Realtor at Keller Williams Realty - Silicon Valley // Aug 13, 2007 at 4:54 pm
I’ll answer both S. Dominguez and Stephanie’s questions at the same time…
I’m sorry to hear that both of you are in a situation where the bank owns the home that you are renting.
When a bank owns a property (REO), they will want to sell it ASAP. The bank is not in the business of owning or renting out properties, they are in the business of lending money. So they want to sell it to someone. I doubt that you will be able to get the bank to let you stay in the house, unless you buy it from them.
Another option is that you find someone who wants to buy the home as an investment rental property, and let you stay there after they buy it. Then you could tell the bank that you located a buyer and see if they will let you stay while the sale is completed.
It can’t hurt to try and talk to the bank about it though. Find out who the lender is and call their “REO” department and ask them what your options are.
I’m not sure if there is anything else I can do to help, but just let me know, and I’ll try to give you any assistance that I can.
Best of luck to you and your children!
10 Sophie S. // Aug 22, 2007 at 11:05 am
Hi Bart,
I’m interested in buying a house that was going to be foreclosed on, but has now been put on hold because the bank seems to be working with the owner. I’m trying to get in touch with the owner to work out a deal, but they no longer live in the home and I’m having trouble locating them. Is it possible to go directly to the bank and try to work out a deal with them?
11 Bart Marchioni, Realtor at Keller Williams Realty - Silicon Valley // Aug 23, 2007 at 5:35 pm
Hello Sophie,
Thanks for your comment. The bank would most likely try to work out a deal directly with the owner if they can. There are several things they can work out together: A reduced payment plan, a short sale, deed-in-lieu of foreclosure, and other options. If no agreement is reached with the owner, or a short sale does not make financial sense for the bank, and a deed-in-lieu is not feasible, then the bank will simply foreclose on the owner and hope it sells at auction. If it doesn’t, then it goes back to the bank as an REO and is sold on the open market. The only thing you can “work out” with the bank as an interested 3rd party, would be to buy the house at a price that is acceptable to the bank in a short sale. This is tricky, because you don’t know if a short sale has been agreed to yet. You can try to call the bank about it, but you may have a hard time trying to find a person who knows anything about the “deal with the owner”, and they’re not likely to give you much information about it, since you are not the borrower.
I’d be curious to hear how it turns out. Could you keep us posted with another message when you learn more?
Thanks, and good luck!
-Bart
12 Klea // Aug 23, 2007 at 9:52 pm
Hi Bart,
Great info. after much reading about all these forclosures, I think I’ll stay away for now as a first time home buy
Thank You!
~Klea
13 Bart Marchioni, Realtor at Keller Williams Realty - Silicon Valley // Aug 23, 2007 at 11:51 pm
My pleasure Klea!
Yeah, foreclosures are not necessarily the best bet for a first-time homebuyer. It takes a lot of persistience, understanding of the process, willingness to take on a distressed property, and not to mention cash!
Good luck in your home search. If I can be of further assistance, please don’t hesitate to contact me!
-Bart
14 John // Feb 5, 2008 at 5:27 pm
Hi Bart,
Thank you for your article - it was very enlightening. I do have a question. I was interested in purchasing a home, but the homeowner decided it was best to have the home foreclosed on based on her attorney’s advice. The home has a principal loan amount of around $660k and then 2 additional revolving lines of credit (100k and 135k). The home is not worth the totality of the loans. If the owner of the principal loan does not foreclose on the home and the junior lienholders choose to foreclose, what would the sales price of the home be at auction? If the home does not sell at auction, who owns the home? Thank you very much.
John
15 Charlotte // Feb 25, 2008 at 10:51 am
My house was recently foreclosed on and the bank bought it back. My ex husband had received the property in the divorce decree. The bank bought the property back for 78,800 and the loan amount was 120,000.00 .When the bank sell the property do they use the profit they made to help satisfy our loan?
16 Anonymous // Mar 3, 2008 at 10:53 am
Bart,
This is about a California non-judicial foreclosure in which the primary lender foreclosed, failed to sell it at auction, and it became an REO. The second lender is now coming after me. What recourse do they have? What recourse do I have to get them to close their loan? We are renting in Florida.
Both banks refused a short sale offer and I just found out that the property sold for slightly less than the primary loan amount. Interestingly, the tax statement for the property abandonment was higher than the sale price and significantly lower than the appraisal price that led them to refuse the short sale.
I have explained to the second lender that the short sale was all I had to offer (they would have gotten 25% of the loan that way, at least) and when they refused it I lost everything I had to give them. They are offering to accept the account as paid in full if I pay 50% ($25,000) but I don’t have that kind of money. We are scraping to manage our cash flow and retirement savings and college savings after moving and starting over, and I think that those will give us higher returns than the cost of the credit damage, given that we already have trashed credit from the first foreclosure. I don’t see any reason to pay them since we already lost the house and we tried everything before foreclosure.
You explained that if the house is bought at auction the 2nd mortgage is essentially out of luck. Does this also count when the house is sold on the market after an auction failed and it became a REO? What can I do to get them to close this loan so we can continue to start over without this outstanding judgment? We are hoping to buy a house again in about 7 years if possible.
Leave a Comment