Buying a Foreclosure

In these trying economic times, there are literally hundreds of thousands of homeowners facing foreclosure on their property.  Foreclosure can mean a huge economic and emotional loss for a family, but it can also mean an opportunity for a buyer, if they choose the right property and the right method of purchasing that home.

What is a Foreclosure?

Foreclosure is the legal right of a mortgage or lien holder to reclaim a property on which they have loaned money in order to resell the property and pay off the mortgage.  Most loans contain a clause that allows the lender to accelerate the loan and call the entire amount due if there is a default on even one payment, although most do not do so immediately. 
There are several types of foreclosures, although there are two that are most common.

• The most common form is foreclosure by judicial sale, in which a court takes possession of that property for sale at auction.  The court then distributes the income to the mortgage holder first, then other lien holders, and if any funds remain, to the property owner last.  This type of mortgage is available in every state, and some states allow only this type.
• Foreclosure by power of sale is less common, although most states allow it.  Once a property owner defaults on their loan, the mortgage holder can sell the property at auction without court involvement, then distributing the income in the same order. 

Foreclosure Procedure

There are a number of steps that are required by law in each state, although those requirements can vary by state.

• A notice of foreclosure is filed with a court and public notice is given of the default, both to the property owner, generally twice, and to the community.  The property owner has the opportunity to satisfy the debt or make other arrangements to pay off the loan.
• A date is set for the sale of the property and all parties with an interest in the property are notified, as is the community
• The auction for sale of the property is held, with title going to the highest bidder or reverting back to the lender if there are no bidders.
• In some states, the property owner has a period in which to redeem the property.

Buying a Foreclosure

While the price may be right on a foreclosure sale, the property may not be.  In some cases, the house may be vacant for many months before the sale, or the property owner may have ceased to maintain the property.  If you are buying the property as an investment, do not expect to turn the property around immediately.  If the owner could not sell it quickly enough to pay off their loan, you will probably be unable to sell it quickly as well.

Short Sales   

Another alternative in today’s strained housing market is a short sale.  If a property owner can no longer make payments on their mortgage, they may be able to come to an agreement with the bank to satisfy the debt with whatever the owner can sell the house for in the current market.  If that amount is less than the amount owed, it is a short sale.  The big drawback of a short sale is the amount of time it takes to complete the transaction.

Anytime anyone enters a major purchase such as property or a new home, they can expect complex transactions that may require the counsel of a real estate attorney.  A foreclosure or short sale can be especially difficult, so a real estate attorney can be essential to meeting all the legal demands.