How does a foreclosure work?

Question

1. What is a foreclosure in general? IS that when you buy the property and you take on the mortgage? Meaning would you take on the Lein?

2. What's the difference between foreclosure and Pre-foreclosure?

3. As a rental investor should I invest in a foreclosure?

Nova Knight · Answer

So are there Leins when you buy them? Like do you get the mortgage that the other person couldn’t pay? Even if you paid for it?

Corby Goade · Answer

I have a ton of prospective clients ask me about how to pick up a foreclosure. Although deals can be had on them, the days of the heavily discounted foreclosure so that a bank can "get the debt off of their books" are gone- at least for now.

Appreciation has been so rapid that banks are hiring brokers to list foreclosures as retail sales, just like any other seller. There are other opportunities to pick up foreclosures, but most of them require cash and with the lack of inventory out there at the moment, competition is still fierce. I see people pay more than retail at auctions all of the time- they get caught up in the competition and overbid.

Preforeclosures are simply properties that a bank has started the foreclosure process, but they are still negotiating with the homeowner to bring the loan current. Lots of investors work these leads and you can definitely find deals this way, but know that it's a very common strategy, so you'll be competing with lots of other investors and wholesalers for those deals.

Best of luck!

Will Fraser · Answer

Hi @Fahadbin Alam, a foreclosure is the legal process of repossessing a home after a borrower has failed to pay (or has otherwise violated the terms of) their mortgage.  The process usually involves a few steps:

• Notice of Lis Pendens - this is the notice that a foreclosure suit is being filed against the person.  At this point, or even before this point when the person starts missing consecutive payments, they may start showing up as "Pre-Foreclosure" on sites like Zillow
• Later, sometimes MUCH later, there is the Notice of Sale. At this point there's almost no going back for the borrower in default.  The next step is the county courthouse (in the case of a sherif's sale)
• Sheriff's Sale - this is where the county administers the sale of the property. If successful, the lender will recoup some or all of the loan that was in default, then this loan is dead.  The buyer is responsible for their own new financing.

So, there's no chance to assume a loan in the Sheriff's Sale type of foreclosure.  If you can find someone who is in Pre-Foreclosure, but has not yet had the Notice of Sale served (usually a pretty large window of time) then there may be a chance for a workout strategy with their lender (like assuming the loan or a short sale) or some other strategy.

One's a Notice of Sale has been issues the house is listed as Foreclosure instead of Pre-Foreclosure usually.

You can absolutely buy foreclosures.  Some people have great luck with them, and others hate them.  All in all a Zillow study a few years back found that auction properties are purchased for an effective 7% discount over retail.    That's real money saved right there for sure, but when you facto in the elevated risk that it presents (buying properties blind sometimes, very limited inspection ability, no agent fiduciaries in the whole equation, etc) it's a LOT of risk for a 7% discount IMO.