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3 Stages of Foreclosure / Shortsale

Do you know the difference?

Deals can be found in all stages of the foreclosure process. Where you begin really depends on your comfort level. The foreclosure process starts when the property owner is not able to make the payments on his/her loan. The lender files a public default notice which begins the pre-foreclosure period, often referred to as the “grace period.” During this time, the following opportunities exist for finding bargains on foreclosure homes.

Stage 1Pre-Foreclosure: A property owner has defaulted on their mortgage payments, but the formal foreclosure has yet to happen. Properties in default can be found at your local courthouse where defaults are registered. The property owner may be motivated to sell his property to a third party to pay off the loan and avoid a foreclosure on his credit report.

This type of sale can also occur through a short sale. A short sale is a sale where the lender approves of the borrower selling his home at an amount less than what is owed. Once a lender ultimately agrees to a short sale (there is a qualifying process), the property is traditionally listed with a local real estate broker. The listing then becomes a three party sale – the buyer, the seller and the mortgage company.

To protect yourself when buying a pre-foreclosure property, be sure to obtain legal advice from a respected real estate lawyer, talk to your CPA about any tax liabilities, and be certain you are working with a knowledgeable foreclosure and short sale real estate agent. For more information on how to qualify for a short sale please contact our foreclosure, short sale expert!

Stage 2Foreclosure: When the grace period ends and the “Notice of Default” had been filed, the home (asset) goes to public auction. Oftentimes, properties sold at auction can be the best bargains but homes bought this way are risky and sales are difficult to execute. For example, court appointed trustees only accept cash or cashier’s check, properties are sold “as is” and there is usually not ample time to conduct thorough home inspections. Back taxes and multiple liens may also apply.

Stage 3Post-Foreclosure: If the foreclosure doesn’t sell at auction, it usually goes back to the lender and becomes an REO (real estate owned). Banks typically list the REO with an experienced real estate broker who markets and maintains the property for resale. The broker will field offers and help in the negotiations. The lenders are still financially responsible for all the maintenance and upkeep so banks are usually very willing sellers. They want a quick sale, normally within 90-120 days of listing the property.

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And for more information, see the following article on the Six Steps for Buying a Foreclosure.

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Six Steps for Buying a Foreclosure

Step 1 – Get pre-qualified. The bank does not want to sit on its inventory. Lenders only entertain offers that are backed by a pre-qualification letter and are not contingent upon the sale of another home.

Step 2 – Hire a buyer’s agent who is experienced working with REOs (foreclosures). Most lenders have special addenda and forms. Make sure you are working with a real estate agent that has experience working with these forms and understands the lender’s sales and negotiation process. Mistakes made in the process can be costly for the buyer.

Step 3 – Get ready to make a quick decision. Foreclosures are likely to be priced lower than other homes on the market and great deals don’t stay on the market for long. Make sure your agent explains to you what penalties will occur if you back out after an offer has been accepted.

Step 4 – Be prepared to buy the home “as is.” Make your offer subject to a home inspection. Then understand what penalties you may be subject to if you cancel the deal.

Step 5 – Be patient! Expect the bank to take a few days to respond to your offer. Depending on the offer and which bank or institution owns the property, more than one level of approval may be needed which can take time.

Step 6 – Be prepared to close on-time. If you cannot close by the predetermined closing date, the bank may charge you a penalty for each day you go past that date, even if it’s for reasons outside of your control. Per the lender’s instruction, don’t procrastinate in providing the documents they need. This is often the reason closings become delayed.