Let’s talk about real estate foreclosures. Real estate investing and real estate foreclosures go together like milk and cookies.
However, there’s a myriad of different types and a multitude of ways people refer to real estate foreclosures.
Additionally, the process of purchasing a real estate foreclosure can be confusing.
Phew! Anyhow, the goal of this post is to help make some sense of all this. I want you to know what real estate foreclosures are and how you can benefit from them.
What are real estate Foreclosures?
Let’s first define what a real estate foreclosure is. Business Dictionary offers this definition:
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“Legal process by which a lender cancels (forecloses) a borrower’s right of redemption of the mortgaged property through a court order (called foreclosure order). The court sets a date up to which the borrower can redeem the property by paying off the entire loan balance (including foreclosing expenses). Thereafter, the lender is free to sell the property and, upon the sale, applies the sale proceeds first to the due amount and pays the remainder (if any) to the borrower. The borrower remains liable for the due amount if the property remains unsold, and for the shortfall if the sale proceeds are insufficient to pay off the entire debt.”
I want to further elaborate on right of redemption. This is a period of time where a borrower can reclaim their property if they pay the debt.
The 3 Stages Of The real estate Foreclosure Process
A property is in pre-foreclosure when the property owner is 3-6 months behind on their mortgage payments.
During this time, the homeowner is under a grace period (1-4 months) where they can either sell the property via short sale, or pay off the debt with the lender.
The lender will attempt to sell the property at auction to the highest bidder if no arrangement is made during the grace period.
If the property is not sold at auction, the lender takes back the property and then works with a REO real estate agent to sell the property on the open market.
Judicial Foreclosures vs. Non-Judicial Foreclosures
So now that we’ve defined what real estate foreclosures are and talked about the different steps in the foreclosure process, let’s examine the two different types of foreclosures in the United States: Judicial Foreclosures & Non-Judicial Foreclosures.
Wether a real estate foreclosure will be judicial or non-judicial depends on the state you’re in, but the main difference between the two is that a judicial foreclosure requires the lender to file a lawsuit in court to foreclose, and a non-judicial foreclosure allows the lender to foreclose without going through the courts.
In either case, the lender will attempt to sell the foreclosed property usually by auction (live or online). Here’s a list some foreclosure auction sites:
HUD Homes & Bank-Owned REO Properties
When a property going through foreclosure fails to sell at auction, the property is then sold back to the lender.
If the property was not financed using a Federal Housing Administration (FHA) insured loan, then the property goes back to the bank as a Bank-Owned REO property. REO stands for Real Estate Owned.
On the other hand, if the property was acquired using a FHA loan, then the U.S. Department of Housing & Urban Development (HUD) acquires the property, and the property is referred to as a HUD Home or a HUD REO property.
In the foreclosure world, you’ll typically hear about HUD Homes and Bank-Owned REOs. However, there are other entities as well that acquire foreclosures such as the IRS, VA, USDA, SBA, Fannie Mae, etc.
During the pre-foreclosure stage, you can work directly with the seller (homeowner) to purchase the property via a short sale (check out this post for more on short sales). A short sale is a great way to purchase a property below current market value.
Additionally, in a short sale situation, since the list price is less than the debt owed on the property, the lender must approve all offers.
Purchasing At Auction
There are two different types of auctions you can purchase real estate foreclosures from: live (in-person) auctions and online auctions.
While the live auctions are commonly held on the courthouse steps or in a courthouse room, most states only require the auction to be held in a place that is accessible to the public.
In most cases, payment is due in full immediately if you win the auction.
Consult A Professional
It’s recommended that you consult a Realtor before attending the auction to help you with the following:
- run a market analysis to help determine value
- get you access to the property
Additionally, you’ll want to hire a title company to conduct a title search to see what liens exist the property as there may be more than one lien.
Pros & Cons of Online Auctions
Online auctions offer the convenience of allowing you to bid and buy properties from anywhere 24 hours a day. However, here are a couple of disadvantages to online auctions:
- you don’t know how many people you’re bidding against
- the auction usually spans multiple days instead of a single day like a live auction.
- likely require refundable deposit up front to register for the auction.
Wait For The Certificate Of Title
Be sure you wait until you receive your certificate of title before beginning renovations. Until you receive the certificate of title, the previous owner may come in at the 11th hour, pay what’s owed, and reclaim their rights to the property.
Purchasing HUD Homes & REO Properties (Post-Foreclosure)
If a foreclosure does NOT sell at auction, the property forecloses to the lender.
Purchasing Bank-Owned REO Properties
A Realtor can pull a list of bank-owned properties for you to consider and get you access. Additionally, the agent can do a market analysis to give you an idea of the value and assist you with all the paperwork needed to submit an offer.
Purchasing HUD Properties
HUD acquires the property if the foreclosure was acquired with a FHA loan.
Before HUD publicly lists properties for sale, they might look to see if the property qualifies for a direct, exclusive sale to a local government or FHA-approved nonprofit organization. If not, then the property is sold to the highest bidder on the HUD Home Store.
Initially, HUD will only accept offers from owner-occupants. This period usually lasts a couple weeks. After it expires, anyone, including investors, can submit offers.
As a final note, you purchase real estate foreclosures “as is.” This means the seller will not do any further repairs to the property.