Local Fourclosure

"How can I buy a foreclosure house around here?" That question was asked of me a few weeks ago at my favorite coffee house, which I often frequent on Saturday mornings. The questioner was one of my former college real estate law students.
This polite young lady explained she and her husband have been trying to buy a house or condo "the regular way" but everything seems so expensive. That's why they are now looking into buying a foreclosure homes, although she remembers from the course about the pros and cons of these distress properties.

We had a brief discussion about the three foreclosure purchase opportunities. But then I made a very bad mistake. Oops! I used a dirty four-letter word I probably should have avoided. It is W-O-R-K.

I reminded my former college student that if buying foreclosure bargains was easy, everybody would be doing it. Then I shared how she and her husband can track foreclosure houses, condos and other properties to determine when the best time to buy is. Suddenly, she lost interest in foreclosures and the work involved as she spotted her husband coming in the door.

WHAT CAUSES FORECLOSURES?

By the time a house, condo or other property enters the foreclosure cycle, the borrower is at least 30 to 60 days behind in mortgage payments. There are many foreclosure causes, such as divorce, illness, death, unemployment, drug and alcohol addictions, mental problems, and local economic conditions.

Statistically, less than 1 percent of homes go through foreclosure each year. But whatever the cause of mortgage default, somebody is going to benefit. If you didn't cause the borrower's default, that person who profits might as well be you.

HOW THE FORECLOSURE PROCESS WORKS

After a home mortgage has been in default over a month, if the lender receives no response from the borrower, it is not unusual for the lender to start the foreclosure process.

Lenders have learned that most home loan defaults are "cured" and reinstated. But until the lender begins the foreclosure process, many borrowers will stall the lender. There are three basic steps in the procedure (and foreclosure bargain-buying opportunities):

1. THE LENDER RECORDS A NOTICE OF DEFAULT OR FILES A JUDICIAL LAWSUIT

Exact procedures vary in each state, but the first step when a mortgage default becomes public knowledge occurs after the lender records a notice of default or files a judicial lawsuit against the borrower.

But the borrower usually has plenty of time to pay the missing mortgage payments plus costs to reinstate the mortgage. The reinstatement period varies by state. Texas has the shortest time, as little as 21 days (although it usually takes longer). Other states allow borrowers two to 12 months to cure their default, refinance, or sell the property to avoid a foreclosure sale loss.
The reinstatement period creates the first opportunity for a home buyer, or an investor, to contact the defaulting owner to see if the borrower would like to sell the property, often at a bargain price.

A buyer who purchases a property with its mortgage in default does so "subject to" the existing mortgage, which must be reinstated or refinanced to prevent the foreclosure sale loss. Such a purchase is also "subject to" any junior liens such as a second or third mortgage, mechanics' liens, income tax liens, judgment liens and unpaid property taxes.

Having bought several foreclosure properties during this time period, I discovered some property owners just want to receive a few thousand dollars in return for their quit claim deed. However, buyers during this "pre-foreclosure period" should always make their purchase contingent on receiving a satisfactory owner's title insurance policy.

A prime benefit of buying during this reinstatement period is the buyer can thoroughly inspect the property. I've even made purchase offers contingent on a satisfactory professional inspection report.

2. BUY AT THE FORECLOSURE AUCTION TO WIPE OUT JUNIOR LIENS

However, some properties are "over-encumbered." That means there is more debt secured by the property that is in default than its market value. Remember, if you buy before the foreclosure auction, you buy must take over payments on all the encumbrances secured by the property.

The big advantage of buying at the judicial or non-judicial foreclosure sale auction (called a trustee's sale in many states) is most liens that were recorded after the mortgage being foreclosed are automatically wiped out. There are a few exceptions, such as unpaid property taxes and IRS tax liens. The result can be a foreclosure sale purchase at an incredible bargain price.
But the disadvantages of buying at the foreclosure auction often include (a) no opportunity to inspect the premises interior, (b) competition from other bidders, and (c) cash (or a cashier's check) is required. Sorry, your MasterCard, Visa, or American Express card is not welcome at foreclosure auctions.

3. BUY FROM THE FORECLOSING LENDER AFTER THE AUCTION

If there were no bidders at the foreclosure auction, as frequently happens, the third bargain purchase opportunity occurs by purchasing from the foreclosing lender who obtained title.

Most institutional lenders do not want to own foreclosed properties. They are in the business of profitably loaning money, not managing real estate.

Only a few lenders enjoy owning foreclosed properties, usually individuals, often known as "loan to own" lenders who want to wind up owning the property by foreclosure.

My personal experiences buying direct from institutional lenders required contacting the lender immediately after the foreclosure sale where there were no bidders. My technique is to send a Federal Express overnight letter to the lender's president, enclosing my purchase offer for just slightly more than the amount of the foreclosed loan. I also include an earnest money deposit check to show my sincerity.

Of course, my FedEx overnight letter never reaches the lender's president. But it does reach the right department, which usually responds promptly.

My goal is to purchase from the lender before the property is listed for sale with a local real estate agent. If the property is in bad condition, I include a photo or say something like "By the way, have you seen this property lately?"