The recent collapses in the mortgage
industry have left a large number of consumers scratching their heads in an
effort to better understand the economics behind borrowing money. From the
opposite side of the spectrum, this rash of foreclosures has left many savvy
real estate investors scratching their heads trying to figure out how they can
make money from the foreclosed properties. Though the processes can be lengthy
and rather complicated, the best place to start is with a basic understanding
of how foreclosure works, and what it actually means.
Foreclosure is simply the act of a
bank, mortgage company, or anyone else who loaned you money for your house
saying, “We loaned you money and you aren’t paying us back in the way that we
agreed. As a result, the loan is cancelled. Pay us now.” Most people cannot
repay the loan immediately so the house is claimed as collateral. This process
can take several different forms.
The first is judicial foreclosure.
Judicial foreclosure involves the court system.
This is the most common type of foreclosure, and in many areas it is the
only legal option of foreclosure available. The court system will oversee the
sale of the foreclosed property and the money made from the sale will go to pay
back the bank or mortgage company. If there is any money left over, it will be
used to pay off any liens that may be held against the property. Liens are
claims that other creditors may place against your property. The lien is a
legal agreement that says. “Party A owes me money, so if they decide to sell
their house then they don’t get any of the money until the debt to me has been
paid in full.” After all the creditors and lien holders are paid, the original
homeowner will get whatever is left.
The second type of foreclosure is non
judicial foreclosure. Also known as “foreclosure by power of sale,” this is the
preferred method by most creditors because the process tends to move much
faster than court supervised foreclosure. This method is not legal in every state.
The distribution of funds follows the same schedule as the court supervised
foreclosures, with the original homeowner finally getting whatever proceeds of
the sale are left at the end.
If you are an investor seeking to take
a 2nd mortgage and buy foreclosed real estate, then you will quickly
become familiar with the term, lis pendens. This is a
Latin phrase meaning “pending lawsuit.” In the world of mortgages and
foreclosures, it is a publicly recorded list of properties that are about to
foreclose. Once the process has begun for judicial foreclosure, the municipal
clerk in your county or town will publish the list of suits that have been
filed. This is a great place to look for real estate investors who may be able
to buy homes directly from people who are about to go through foreclosure. It
is a chance to pick up property for a good price and for them to avoid going
through the foreclosure process.
Before a suit is filed, the creditor is
required to issue a Notice of Default. This is a legal notice that informs you,
the borrower, that your original loan is in default status and that the
original agreement that was established for payment is no longer binding. Most
lenders will place a mortgage into default status when the payment reaches the
point of being 90 days late. By day 95, the Notice of Default will have been
presented to you. If you have a default loan you may still be able to salvage
your home, but you will need to act quickly.
As a real estate investor, there are
two different ways to buy distressed properties. The first is to purchase
pre-foreclosure properties. It is pre-foreclosure because the property still
belongs to the original homeowner. Though proceedings for the foreclosure may
be underway, the homeowner may be willing to sell the property for just enough
to satisfy the amount of the loan. This leaves the investor with a great deal
on a piece of property and the homeowner avoids the traumatic experience of
foreclosure. Foreclosure property sales that are not “pre” have already reached
the point where the property is back in the banks name and they are selling it
just to see how much they can recover. Again, this is a great opportunity to
buy, as the banks often don’t push for higher prices at auction. They simply
want to recover the outstanding portion of the loan.
The increase in sheer volume of
foreclosure is evidence that many people simply do not understand what they are
getting into when they buy their first home. Having identified this as a
problem, there are many government back institutions and even some private
ones, who offer assistance to home buyers. While they can help you secure
funding, organizations like VA/HUD, Freddie Mac, and Fannie Mae are also
excellent sources of information.
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