In a recent post I discussed buying REO properties (Real Estate Owned by the lender). It dawned on me that it could be helpful to have a quick overview of the foreclosure process. Something that highlights the major phases.
As investors there are opportunities during any phase. There are strategies that are tuned for a specific phase.
The foreclosure phases in order are:
Payments are late. – pre-foreclosure actually
Notice Of Default (NOD)
Payments are late.
The borrower is struggling. They have missed 1 or more payments. Only they and their lender know. Maybe they have not even received a warning from the lender yet as they only just missed a payment. Normally something happened personally that caused the borrower to fall behind. Or maybe their loan payment just reset to a much higher amount which they can not afford.
Most foreclosure investors do not focus on this stage. Those that do will use advertising – website or direct mail ads offering to buy for cash or otherwise provide advice. Subject-to investing is one way to structure a deal this stage. Lease/options, PAC Trusts or land contract deals (sometimes called contract for deed) are also used at this stage. Or a simple purchase with new financing from the investor. You also see people flipping deals after getting the property under contract.
Notice Of Default (NOD)
This is the start of the formal process. It might be called something different in a particular state. A NOD is the filing in the public records that there is a loan in default. The lender is telling the world that they intend to take action to protect the loan they own. They will auction off the property securing the loan if the borrower does not cure the default.
There could be public notices published in the press. There will be a notice filed at the recorder’s office. If the process is a judicial process rather than a trustee sale there will be court filings. The borrower will be served or otherwise notified.
Many investors who chase foreclosures start targeting a property and the owner once they public notice, the NOD, has been filed. At this stage the techniques noted prior will still work plus you can attempt a short sale if the lender is interested. You can also try to buy the note and become the lender who is foreclosing on the borrower.
The period during which the borrower was given the right to cure the default is over. The property is now being sold at auction. The threat is becoming real.
Many borrower/owners think that some miracle will solve their problem and are in denial up until the auction happens. A few really did have a plan but it did not work. Most just could not face the reality or really have no viable options other than the auction.
Once the auction starts the end of the foreclosure process is near.
Investors who bid at auction are cash bidders. They need to have all cash. There is no time to obtain a loan secured by the subject property. There is no time to do an inspection. Your bid is binding and you take the property subject to any senior liens on the property. The lender selling might not be in first position so know the state of the title and the lender’s position.
In some states or under some types of foreclosure the borrower/owner who lost their property have a right to redeem the property if they come up with all the cash needed to effectively buy it back.
Some investors will buy the prior owner’s redemption rights. The investor would then have the right to turn over the cash in exchange for the property. It is a bit like buying an option in that you do not have to go through with the purchase if you buy the redemption rights.
When a property does not sell at auction the lender takes it back. More correctly the lender submits an initial or opening bid. If no one bids higher the lender wins. They are now the proud owner of the property. There is no more loan secured by the property as that was retired when the auction concluded with the lender becoming the owner. There could be senior liens that the lender now has to deal with or otherwise pass on when the lender sells the property.
That covers the foreclosure timeline. Some related thoughts…
As noted at the start, there are different strategies for each phase. Some are more time intensive while other strategies just depend on large sums of cash being available to bid at auction. Buying from a lender means the seller is not emotionally attached. Buying from a person after the NOD has been filed many times means buying from a family facing the loss of their home. Buying late in the process means the property has been picked over by other investors. It could also mean that junior liens were wiped out.
Or, you can buy the junior liens if that enhances the deal. Buying liens (buying the note that is backed by a lien) is another topic that I can discuss at a future date.
Understand that the property you want to buy might be in a condition where you can not easily obtain financing even if you have good credit. Hard money or other means would be advised in those situations.
At all phases in the process you are likely dealing with a motivated seller. How motivated and how realistic is another story. Many sellers facing foreclosure think they have equity in the property and want to get paid for that equity. If no deal is done there is no equity so they need to think real hard about their options and the time remaining. Even lenders can be highly motived to sell REO property. If they are a bank they legally can not hold the property long term.
I hope the above helps provide a bit of perspective to the US foreclosure process (49 states & DC at least). If you are a serious foreclosure investor then you need to read up on the laws for your state. Note that there can be consumer protection laws that are designed to protect the borrower facing foreclosure from real estate investors. In many cases the laws make it harder for the investor to do a deal. This can also mean there will be more auctions and REOs with more borrowers having a full blown foreclosure on their credit report. Learn the regulations. Do not assume that the consumer protection rules covering foreclosures actually protect the borrower. The law might harm you the investor while preventing the borrower/owner from selling before the lender seizes the property.
Operate legally at all time.
Even investors can get it wrong…
Casey Serin was a newbie investor who jumped in too quickly and fast found out what it is like to be in foreclosure (multiple times). He has documented his experiences on the I Am Facing Foreclosure blog. Even investors can get in over their head. Do be warned that many of the comments posted in response to his story are personal attacks on Casey. Casey clearly missed the bigger picture when he set up some of his deals. Try to learn from his experience rather than repeat his experience.