Foreclosures 101

What is foreclosure?

According to Wikepedia, “foreclosure is the legal and professional proceeding in which a mortgagee, or other lienholder, usually a lender, obtains a court-ordered termination of a mortgagor’s equitable right of redemption.”To put it simply, foreclosure is a legal process in which a lender takes over ownership of a property when the borrower is in default of payment.

Foreclosures can end in several ways, including pre-foreclosures, auctions and Real Estate Owned (REO), all of which are explained in further detail in this section.

For prospective buyers, foreclosures can result in significant savings, since the lenders that take back the properties typically aren’t in the business of being landlords and will do whatever they can to sell them.

What are the two types of foreclosure?

1. Non-judicial, which occurs in deed of trust states. In this type of foreclosure, a third party that is empowered to foreclose or take back the property when the mortgage is in default holds title. Since the lender does not need to file a lawsuit against the mortgage holder to foreclose or take back the property, these foreclosures can take as few as 60 to 120 days.

2. Judicial, which occurs in mortgage states. Since the mortgage holder holds title and has to go to court to rectify the matter when the mortgage goes into default, this type of foreclosure can take much longer than non-judicial.

FYI: Florida is a mortgage state with a judicial foreclosure process.

Four steps to foreclosures

Understanding the four steps to foreclosure can help prospective buyers to purchase properties at the best possible price.

1. Pre-foreclosure. This is the period during which a property owner starts missing payments but before formal legal action has been taken. During this time, a property owner may be more likely to consider any offer if it means saving their credit and avoiding full foreclosure.

2. Notice of Default (NOD). This is the first legal step taken in a formal process of foreclosure.

3. The foreclosure sale. Depending on whether it is a judicial or non-judicial process (each state varies), the foreclosure sale can take as long as a year. Judicial foreclosure sales are often held on courtroom steps as soon as a judgment is reached.

4. Redemption period. This is the time period some states (not Florida) allow for a property owner to get title back, provided they pay the full balance of the loan and various fees. Prospective buyers need to know if they are purchasing a foreclosed property that has a redemption period, since they won’t want to make major improvements to the property until they know for sure it is theirs.

A pro -- and some cons -- to consider

Since no transaction is truly without risk, here are some downsides to foreclosures -- and one very good reason why purchasing a foreclosure may be right for you:

Pro
- A foreclosed property can often be purchased at a better price. In fact, the savings can be so significant it can outweigh all of the following cons:

Cons
- Foreclosures can be emotionally draining since they are the result of another person or family losing their American dream.- Very often, foreclosed properties have been left empty, neglected and vandalized, resulting in immediate expenses for the new owner.- The legalities of purchasing a foreclosed property can be much more complex and challenging than a traditional real estate sale.

Where to turn for help?

When purchasing a foreclosed property, you will likely want one or all of the following professionals on your team:

1. Realtor®. A Realtor® is professionally trained to deal with all types of transactions, including foreclosures. Some real estate firms even have departments devoted entirely to foreclosures.

2. Home inspector. Since foreclosed properties have often been neglected and vandalized, this is especially important here. Even auctions leave a window for interested parties to examine properties before they’re put on the block. If you’re unable to inspect a property prior to purchase, follow your gut, but you might want to move on to the next property on your list.

3. Mortgage broker or lender. Even if you find the foreclosed property of your dreams and can agree on a purchase price, securing a loan has never been more difficult. Before you even begin your search, you should consult with a mortgage broker or lender to determine if you’re qualified to purchase and for how much.

4. Attorney. Foreclosure transactions can be complex and intimidating. Florida does not require buyers to have an attorney, but hiring one here can save you lots of time, money and aggravation in the end.