How to Buy a Foreclosure

With so many foreclosures on the market today and homeowners seeking foreclosure help, there is a great opportunity for some people seeking to purchase a new home to find a bargain, if they know what to expect and are willing to deal with the drawbacks involved in buying a foreclosure.

What is a Foreclosure?      

Most loans contain a stipulation that if the homeowner defaults on the loan, the lender has the right to accelerate the loan and call for full payment.   This can legally be done after one missed payment, but lenders often allow more leniency than that.   If, in the end, a foreclosure is ordered, it means that the mortgage holder has reclaimed the property to sell at auction, using the proceeds to pay off the debt of the property owner.  
There are two common types of foreclosure.

  • Foreclosure by judicial sale is the most common form of foreclosure, used throughout the country and mandated in some states.   A property with a mortgage in default is claimed by the lender and assigned to a court for sale at auction.   The court then distributes the income to the mortgage holder and other lien holders.   If any funds remain, they go to the property owner.  
  • Less common, but still allowed in most states, is foreclosure by power of sale.   A mortgage holder can sell the foreclosed property at auction.   No court involvement is necessary, and the local authority that conducts the auction distributes the income in the same order.  

Foreclosure Procedure

The foreclosure procedure is quite detailed in order to protect the rights of the property owner, the lender, and any other lien holders who may have interest in the property or the proceeds of the sale, although those details vary by state.

  1. The lender files a notice of foreclosure with the court, posts a public notice of the default, and notifies the property owner, generally twice.   The property owner may be able to find a way to satisfy the debt during that notification period
  2. The court sets a date for the auction and notifies the community and all parties with an interest in the property
  3. The court holds the auction, transferring title to the highest bidder or to the lender if there are no bidders
  4. The property owner may have the opportunity to redeem the property in some states before the new owner takes possession

Buying a Foreclosure

There are some pitfalls to buying a property at a foreclosure auction.   Once a foreclosure is identified, it may take months for the actual auction to take place.   In addition, the property may have been vacant for months or the owner may have been unable or unwilling to maintain it, resulting in additional costs when buying a foreclosure.

Short Sales            

Short sales are another alternative for homeowners who default on their mortgage loans.   If the bank   is willing to negotiate, the homeowner may be able to sell the home, even for less than the amount that remains on their mortgage, satisfying the entire mortgage.   For those interested in buying a short sale, again, it takes time for a homeowner and lender to reach an agreement for a short sale, and then for the homeowner to sell the property even at a reduced price.

Real estate purchases are complicated enough without adding the special circumstance of a foreclosure or short sale.   It can be unwise to attempt to conclude this kind of transaction without the counsel of a real estate attorney experienced in this field who can help you reach a beneficial conclusion to a difficult process.

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