Buyers often equate the word “foreclosure” with below market value pricing.But is that really the case? You may THINK you know, but do you really?
What is a foreclosure? In the simplest terms, a foreclosure is a legal proceeding by which property is repossessed by a lender due to the borrower’s failure to fulfill the terms of a mortgage or deed of trust. In most cases, this means the borrower has either been unable or unwilling to make the agreed-upon payments.
All foreclosures are not created equal. There are several different types of foreclosures in the United States, and foreclosure laws can vary by state. The two most common types are foreclosure by power of sale (also known as non-judicial foreclosure or trustee’s sale), and foreclosure by judicial sale.
Non-judicial foreclosure, or “trustee’s sale”. This is a widely recognized and accepted foreclosure process and may be faster and less expensive than judicial foreclosure. In this arrangement, the mortgage holder sells the property without court supervision. This non-judicial foreclosure takes place when a power of sale clause exists, authorizing the lender, in the event of default, to sell the property as a means to satisfy the loan balance.
Foreclosure by judicial sale. This procedure is used when no power of sale is present in the mortgage or deed of trust. A lawsuit must be filed and a court order obtained before foreclosure can take place. Once a court declares a property foreclosed, generally it is then auctioned off to the highest bidder. However, as part of this process the lender could request a deficiency judgment. In this case, the borrower may be given up to one year to redeem the property.
Are foreclosures great deals for homebuyers? They certainly can be … but not always. Each foreclosure is different, and it depends on what you want and what you can afford. One thing to keep in mind is the time factor. Depending on the state and the type of foreclosure in place, the current resident could be allowed to stay in the property for anywhere from four months to almost a year. Also, there is the possibility that the current resident may regain control of the property, as almost every state offers a redemption period.
It’s also important to note that there are certain procedures that must be followed in order to properly purchase a foreclosed property. Many states will require a buyer to provide the seller with particular disclosures, and failure to provide these (and/or failure to use the correct paperwork to prepare offers) can result in the revocation of the sale, fines or even the possibility of a lawsuit.
So, what should you do if you want to buy a foreclosed property? You’ll want to determine what the facts of the foreclosure are – including what type of foreclosure is in place, how long it has been in place, etc. First things first, consult a real estate professional, preferably one with foreclosure experience, and consider speaking with a real estate lawyer as well.