What are the steps and important things to remember when looking at foreclosures?

11 Replies

What do people intend to do when looking at foreclosures?

Is it to repair and sell? Rent? Is it possible to wholesale?

I am new to this and asking to gain more knowledge on the subject of foreclosures as a whole

Are you referring to properties that are already foreclosed or properties up for foreclosure sale? If you are talking pre-foreclosure one HUGE factor is determining which lien is being foreclosed on. There have been bidders that are the high bid at 40K on a 200K property thinking they hit a home run. After the fact, they find out they were the high bidder on a 2nd position mortgage and now they owe x amount on the 1st position lien. Proper research of liens is important. Other factors are going to be property condition, vacant or inhabited, rehab costs if needed, financing (typically they are all cash deals), etc. Some experienced investors have done very well bidding on foreclosures. Others have not done so well. Keep in mind that buying a property at foreclosure auction does not mean it is a deal. Sometimes the banks will bid the full amount owed even though the property is worth quite a bit less.

@John Thedford  

I am looking for more knowledge on foreclosure sales but also to know more of the difference between the two you just mentioned. Excuse my lack of knowledge. 

Could you also please go more into depth of liens?

If a property is already foreclosed on you would be buying it from the creditor (bank, private lender) etc. If it is a foreclosure sale (such as at the courthouse steps or online bidding) you are going to be bidding against the lienholder as well as other interested parties. Liens are given a priority according to when they are filed. A 2nd lien is one filed AFTER the first one was recorded. A typical lien might be a HELOC against a property that was filed after the initial purchase was financed. If you are the high bidder on a lien that is inferior (recorded after the first one) you are still obligated to pay off the 1st one.

Liens are filed in priority, the first one filed in time will have priority over other future liens filed, they are referred to as being a 1st being the highest priority and 2nd, 3rd and on.

Not all lien holders may foreclose, that will depend on state laws, but as John mentioned, if you were to purchase a second mortgage you would have to clear the senior lien or the first, you wouldn't have to pay junior liens to the one you purchased, like a third position as it will lose it's lien status in the foreclosure sale.

Generally, the classifications of liens are in priority, but there are other liens by statute which may take a higher priority or not be extinguished through a sale, such as tax liens, HOA liens, child support or court ordered liens depending on state law.

This is why you need to check title prior to looking at any auction sales. :)

@Bill Gulley  Would it be wise to avoid houses with liens?

Yes, you're looking at all liens and their priority and what liens you would have to pay or clear for marketable title. And, no, most properties, especially foreclosures have liens, otherwise they wouldn't be in foreclosure.

You're really jumping in the deep end of the pool without having earned your water wings at the shallow end, beginning as I mentioned learning the basics of RE, that is understanding title, what liens are, what encumbrances are and building off that foundation. You're really wasting your time trying to bypass elementary school jumping into a high school class, it's much the same thing.

I know people want to jump in and make money, that gurus have spoiled the brain cells dealing in common sense and logic playing on desperation and just blowing smoke, but really, you can try to figure these matters out for a year and still not know what you need to know, as simple, basic issues have a way of rising up and biting you by surprise losing you money. :)

Janelle

Yes knowing what remains after the sale lien wise is prime. Knowing what price you should pay is just as important. I used to buy at trustee sales in California and you had to pay when you won the bid. No deposit and come up with the rest of the money in some time period stuff.

What bidders at these sales didn't know is what was the true condition of the property. They did drive-bys but in many cases couldn't get or see inside before the sale. If I was going to bid I wanted to see the inside, and if it was occupied I would explain to the owner or tenant that I was planning on bidding if it went to sale. Now many times by doing this I would be able to make a deal with the owner and get it before the sale. 

But at the least I got to see the inside because after a little rapport building at the front door I would say I know you don't want to be bothered with a bunch of people inspecting your home and taking up your time so I would like to make it worth while to you, Ill be happy to pay for the honor of you showing me your home. I always carried a couple of $50 bills and I would pull one out of my shirt pocket as I said it. Some time I had to pull out a second one, but one thing for sure it was often a wise investment. and I had more info then the other bidders. 

One of my favorite stories about judging a book by it's cover I told here or somewhere. I used to go to many sales with another investor and often we were interested in the same property so we came up with a rule that when we were both interested we would flip a coin and that gave the winner the right to bid but the other had a right to a bid IOU for the next time. Well we drove by one home and it was a dream home and I wanted it to move into. couldn't see the inside but he wanted it too.  We flipped, I lost and he won the bidding and was really excited.  So we called a locksmith and met him at the property. When we opened the door it was a shocker, the former owner had completely removed the interior, every thing, the out side walls were propped up with 2x4's, The roof just being held up by the outside walls, no floors, just the former crawlspace. I said a silent thank you to the man upstairs for letting me lose that flip. We also added a new item to our due diligence list. Talk to the neighbors.

@Brian P.  Thank you for sharing valuable information and your personal experiences!!

The foreclosure process varies significantly from state to state, so it's always important to check out the local laws concerning foreclosure in your area. An average foreclosure can take anywhere from 6 months to 1 year. If the state has a redemption period (time given for the homeowner to purchase back the home), you can stay in the house even longer. Here is a basic overview:

Pre-Foreclosure Stage: A borrower is in default when a payment is 30 days late. When this happens, the lender will issue a Notice of Default when you are between 30 - 90 days late.

The Notice of Default will provide a deadline for the payment of the total past due amount which includes all past and current payments with late fees and interest. Lenders will give you between 30 - 90 days to make pay the past due amount.

After approximately 3 - 6 months, the bank will issue a Notice of Sale and set a time for the sale to occur. The law usually requires a certain amount of time to pass between the Notice of Sale and the sale date (which can range from 3 weeks to 6 or more months). This gives the home owner time to sell the property before foreclosure. This is called a short sale.

If the property is not sold before the date of the foreclosure sale, it will be auctioned off as scheduled. In some states, the original homeowner may be entitled to a period of redemption after a foreclosure sale is complete. During this time, they may regain control of their property if they pay off the full loan debt plus any associated interest, costs, or fees. In some areas, the period of redemption may last for up to a year. 

@Simon Campbell  wow... thanks for explaining what a short sale is as well!! Is there any other information you can provide about short sales to add to my knowledge ??

Short sales can trash a person's credit almost as bad as a foreclosure. The latest Fannie Mae guidelines state that after a deed-in-lieu of foreclosure, preforeclosure sale, or short sale, there is a mandatory waiting period of two years for a loan with an 80% maximum LTV (loan-to-value ratio), or four years for a loan with a 90% LTV. If the borrower can document extenuating circumstances, the waiting period for a loan with a 90% LTV drops to two years.

FHA requires borrowers who weren't paying their mortgage when they sold their house to wait three years before they can qualify for a home loan. That time penalty may be waived in certain cases, including long-term job loss. There is no FHA time penalty for homeowners who made their house payments in the 12 months before their short sale. The size of a down payment can also shorten the waiting period.

The USDA loan program is a popular option for people who have had a short sale or foreclosure in their past because it is one of the mortgage programs with the shortest waiting periods and most flexible underwriting guidelines. The waiting period for a USDA loan after a short sale can be as little as 2 months in the right situation. Requirements include: Credit Score of 660 or higher and no late payments for the past 12 months (this can be a real clincher).

Of course, each case is unique and requirements have a sneaky way of changing.

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