Home Foreclosure: How Does it Work?
The world of home foreclosure can be confusing to those new to real estate. Buying a foreclosure is a great way to find a good deal, especially in competitive markets. Home prices are expected to rise 4.3% next year and 3.6% in 2020 which is twice as fast as the speed of inflation.
Because of this competition, a lot of buyers are interested in foreclosed properties, but it’s not as simple as it seems at first glance. Foreclosed homes belong to the bank, and before this, they belonged to a homeowner who left the home either voluntarily or involuntarily. There are a lot of aspects to foreclosure to consider, from why the seller lost their home to the auction process.
What Causes Foreclosure?
The first thing to understand is just how the seller went into foreclosure in the first place. Foreclosure is what happens when a homeowner no longer pays their mortgage. It’s a legal process in which the owner forfeits their rights to their property to the bank.
When people think of foreclosure today, they likely picture the market crash of 2008. During this time, many homeowners walked away from their homes simply because the value dipped so low. Today, however, homes go into foreclosure for a number of reasons:
- Excessive debt and growing bills
- Divorce or break-up with co-owner
- Expensive maintenance problems
- Job loss or relocation
- Inability to keep working
While we refer to the owner of the home as the “homeowner,” it’s important to realize that this term is misleading. Because the homeowner has a mortgage, they’re actually a “borrower.” Most mortgages are considered “secured” loans, and that means the lender can recover a portion of the debt by seizing the property and reselling it.
The foreclosure process is lengthier than most buyers think. After the borrower fails to make timely payments on their mortgage for 3-6 months, they’re given public notice. This is technically called a Notice of Default (NOD) in many states. This notice lets the borrower know they’re in danger of losing their rights to the property.
After the NOD from the lender, the borrower enters a period called pre-foreclosure. This can last up to 120 days, and this is when the borrower will attempt to find an arrangement with the lender. They might choose to pay the amount owed or opt for a short sale. A short sale is the sale of a home for an amount that is less than the unpaid mortgage.
Many home investors actually prefer to purchase homes during the short sale before the foreclosure proceedings are final. However, if there’s no agreement reached between the lender and the borrower, the foreclosure continues into an auction. A foreclosure auction is also known as a Trustee Sale, and the home is auctioned off to the highest bidder for a cash payment.
It’s important to note that besides needing to purchase auctioned properties in cash, buyers also must purchase them “as is.” This means there are no inspections allowed before making an offer. Because there’s no way to assess the property, it’s important to be aware of risks like structural or interior damage.
Finally, if the home is not sold at the auction, the lender reclaims ownership. This is called a bank-owned property or REO (real estate owned). These home are then re-sold through a local real estate agent or through the open market. They might even be sold through a liquidation auction.
Real Estate Foreclosures
While real estate foreclosures can be a reliable way to get a steep discount on a home purchase, it’s a complicated and often risky process. It’s in the buyers best interest to find a real estate agent who specializes in auctioned and foreclosed properties to help navigate these homes.
After the auction process, banks often sell foreclosures in bulk. This means the lender will package several properties into one transaction and sell them all at once. This can offer an even more significant discount. The real picture of home foreclosure is often an ugly one, and it’s important to take this process seriously as a buyer.