- How does a home go into
foreclosure?
Foreclosure proceedings usually begin
after a borrower has skipped three mortgage payments. The lender will record a notice of
default against the property. Unless the debt is satisfied, the lender will foreclose on
the mortgage and proceed to set up a trustee sale.
- Are foreclosures an option?
A foreclosure property is a home that has been
repossessed by the lender because the owners failed to pay the mortgage. Thousands of
homes end up in foreclosure every year. Economic conditions affect the number of
foreclosures, too. Many people lose their homes due to job loss, credit problems or
unexpected expenses.
It is wise to be cautious when considering a foreclosure.
Many experts, in fact, advise inexperienced buyers to hire an expert to take them through
the process. It is important to have the house thoroughly inspected and to be sure that
any liens, undisclosed mortgages or court judgements are cleared or at least disclosed.
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- What are problems buying
foreclosures?
Buying directly at a legal
foreclosure sale is risky and dangerous. It is strictly caveat emptor ("Let the buyer
beware").
The process has many disadvantages. There is no financing;
you need cash and lots of it. The title needs to be checked before the purchase or the
buyer could buy a seriously deficient title.The property's condition is not well known and
an interior inspection of the property may not be possible before the sale, says Wiedemer.
In addition, only estate (probate) and foreclosure sales are
exempt from some states’ disclosure laws. In both cases, the law protects the seller
(usually an heir or financial institution) who has recently acquired the property through
adverse circumstances and may have little or no direct information about it.
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- What types of foreclosure
are there?
Judicial foreclosure action is a
proceeding in which a mortgagee, a trustee or another lienholder on property requests a
court-supervised sale of the property to cover the unpaid balance of a delinquent debt.
Nonjudicial foreclosure is the process of selling real
property under a power of sale in a mortgage or deed of trust that is in default. In such
a foreclosure, however, the lender is unable to obtain a deficiency judgment, which makes
some title insurance companies reluctant to issue a policy.
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- What happens at a
trustee sale?
Trustee sales are advertised in
advance and require an all-cash bid. The sale is usually conducted by a sheriff, a
constable or lawyer acting as trustee. This kind of sale, which usually attracts savvy
investors, is not for the novice.
In a trustee sale, the lender who holds the first loan on the
property starts the bidding at the amount of the loan being foreclosed. Successful bidders
receive a trustee's deed.
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- How do you get financing
for a foreclosure?
One reason there are few
bidders at foreclosure sales is that it is next to impossible to get financing for such a
property. You generally need to show up with cash and lots of it, or a line of credit with
your bank upon which you can draw cashier's checks.
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- Where can you find
foreclosures?
In most states, a foreclosure notice
must be published in the legal notices section of a local newspaper where the property is
located or in the nearest city. Also, foreclosure notices are usually posted on the
property itself and somewhere in the city where the sale is to take place.
When a homeowner is late on three payments, the bank will
record a notice of default against the property. When the owner fails to pay up, a trustee
sale is held, and the property is sold to the highest bidder. The financial institution
that has initiated foreclosure proceedings usually will set the bid price at the loan
amount.
Despite these seemingly straightforward rules, buying
foreclosures is not easy as it may sound. Sophisticated investors use the technique so
novices may find themselves among stiff competition.
Resources:
- "The Smart Money Guide to Bargain Homes, How to Find and
Buy Foreclosures," James I. Wiedemer, Dearborn Financial Publishing, Chicago; 1994.
- "Real Estate Principles," Charles O. Stapleton III,
Thomas Moran and Martha R. Williams, Dearborn Financial Publishing, Chicago; 1994.
- "Real Estate Investing From A to Z," William H.
Pivar, Probus Publishing, Chicago, 1993.
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- Where can you find
foreclosed HUD homes?
The U.S. Department of
Housing and Urban Development acquires properties from lenders who foreclose on mortgages
insured by HUD. These properties are available for sale to both homeowner-occupants and
investors.
You can only buy HUD-owned properties through a licensed real
estate broker, whose commission will be paid by HUD.
Down payments vary depending on whether the property is
eligible for FHA insurance. If not, payments range 5 to 20 percent. When the property is
FHA-insured, the down payment can go much lower. Each accepted offer must be accompanied
by an "earnest money" deposit equal to 5 percent of the bid price not to exceed
$2,000, but not less than $500.
You should be aware that HUD homes are sold "as
is," meaning limited repairs have been made but no structural or mechanical
warranties are implied.
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- Do you have to buy HUD
homes through a realty agent?
You can only
purchase a U.S. Department of Housing and Urban Development property through a licensed
real estate broker. HUD will pay the broker's commission up to 6 percent of the sales
price.
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- What about buying a
foreclosure "as is"?
Buying a
foreclosure property can be risky, especially for the novice. Usually, you buy a
foreclosure property as is, which means there is no warranty implied for the condition of
the property (in other words, you can't go back to the seller for repairs). The condition
of foreclosure properties is usually not known because an inspection of the interior of
the house is not possible before the sale.
In addition, there may be problems with the title, though
that is something you can check out before the purchase.
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