Foreclosure is the sequence of legal proceedings by which a lender sells or repossesses a home when the homeowner has stopped making payments on the mortgage. As a homeowner, understanding the individual steps of the sequence is critical to understanding your rights and responsibilities along the way.

These days, very few states require the lender to take the homeowner to court to foreclose on the home. The process in most states is known as nonjudicial foreclosure.

Stage One: Missed Payments

In most states, a homeowner must fall 90 days behind on their mortgage before the mortgage lender can legally initiate the foreclosure process. So if you have missed fewer than three payments, you’re not actually in foreclosure. However, this phase is very important, because (a) you have to go through it before the foreclosure process can start, and (b) this is the phase in which you as a homeowner have the most options at your disposal.

If you are in the missed payment stage, this is the best time to rework your finances, to call your lender to work out a compromise, and to put your home on the market for a fast sale. Check out “7 Steps to Avoid Foreclosure” for specifics on what to do in the missed payments phase.

Stage Two: Pre-Foreclosure

Once a homeowner’s mortgage payments have not been made for at least 90 days, the lender records a public notice that the owner has defaulted on their mortgage, and then mails the notice to the homeowner. In some states this notice is called a Notice of Default (NOD); in others, it is a Lis Pendens. Depending on the law in your state, the lender might be required to post the notice on your front door.

This pre-foreclosure stage is really a grace period; it gives a homeowner three calendar months to “cure” your default. What’s the cure? You can either work out an arrangement with the lender, sell the place or come up with the cash you owe. Read “5 Ways You Can Stop the Foreclosure Process” to kick-start your plan.

Stage Three: Auction

If the default is not cured within three months after the Notice of Default is issued, the lender or their representative (the foreclosure trustee) sets a date for the home to be sold at an auction called a Trustee Sale. The Notice of Trustee Sale is recorded with the County Recorder’s Office, delivered to the homeowner, posted on the door of the property and published in a local newspaper — to make sure everyone knows when and where the auction will be.

This auction is either held on the steps of the county courthouse or in the trustee’s office. In many states, the homeowner has the “right to redemption” (he can come up with the outstanding cash and stop the foreclosure process) up to the moment the home is sold at the auction.

At the auction, the home is sold to the highest bidder. The big catch is that these auctions require cash payment in most states; few third-party buyers can afford to bring enough cash to the courthouse to pay in full. As a result, many lenders either simply ink an agreement with the homeowner to take the property back (called a deed-in-lieu of foreclosure — see No. 4 in “5 Ways You Can Stop the Foreclosure Process”) or buy it back themselves at the auction.

Stage Four: Post-Foreclosure

If a third party has not purchased the property at the foreclosure auction, the lender takes ownership of it. Then, the property becomes what is called a bank-owned property, also known as REO, short for Real Estate Owned (by lender).

REOs are sold in one of two ways. Most often, they are listed with a local real estate agent for sale on the open market; they are usually put on the multiple listing service (MLS) so that local buyers’ agents can show and sell the property to a qualified buyer for a commission. Some lenders prefer to sell their REO properties at an REO liquidation auction, often held in auction houses, at convention centers or at the property.

By Tara-Nicholle Nelson, Esq.,

There are many flavors of compromise you can strike with your lender if you are facing foreclosure. One of the toughest to execute is the short sale.

What Is a “Short Sale”?

The title “short sale” is somewhat misleading; many assume that “short” means quick, implying a transaction that has a short escrow period. Au contraire. A short sale refers to a homeowner’s sale of their home for a net sales price (after commissions, closing costs, etc.) that is less than what the homeowner owes their mortgage lender(s).

Why Is a Short Sale Desirable?

A short sale is an alternative to foreclosure. A short sale prevents you from having to go through the foreclosure and eviction. A short sale does make a smudge on your credit report but is much less traumatic to your credit than foreclosure.

What Makes a Short Sale Hard to Complete?

Because a short sale results in the lender losing (a) funds they are owed and (b) the property which secured the mortgage loan, these transactions must be done with the full participation and agreement of the homeowner’s lender(s).

Lenders are institutions, not people. They often move at a snail’s pace when evaluating a request for a short sale. Short sales are more frequent in a declining market — many lenders are simply not equipped to handle the deluge of short sale requests they receive.

Realtors who work on short sale transactions all have stories of trying for weeks to get the short sale “package” to the correct person in the loss mitigation department! Once the package is in the hands of the right person, the bank may have some reason they disagree with the deal between the buyer and seller, and may insist on inserting the bank’s price increase, reduction in closing cost credits, or other major alteration of the terms of the deal.

During a short sale, the buyer, seller and even the real estate agents are somewhat subject to the whims of the bank — the deal cannot be done without the bank’s agreement.

How to Get Your Lender to Agree to a Short Sale

With all that said, short sale transactions are completed every day! Because the lender is likely to take so much time processing your short sale request — and because time is of the essence — you must ensure that your short sale request itself is as articulate, thorough and persuasive as possible. Here are some concrete actions you can take to maximize your chances for success.

1. Approach your lender as soon as you think you might need to request a short sale.
   If you are struggling to make your mortgage payments, list your home with a reputable real estate agent as soon as possible. If they advise you that your home is likely to sell for less than you owe on it, immediately contact your lender’s “workout” department to request a short sale package. If you can get your lender to indicate how much of your mortgage they are willing to forgive up front, you boost your chances of working with a buyer to create a deal that is a bargain for them, but likely to be accepted by the bank, too. 
2. Authorize your real estate agent — in writing — to work and to negotiate directly with the lender.
   But make sure to stay on top of the communications between your agent and your lender. Delegate; don’t abdicate! 
3. Make sure an offer is presented in its best light.
   Make sure your real estate agent includes a cover letter that explains the buyer’s qualifications to buy your home, how much down payment money they propose to put in — anything that might boost the lender’s confidence. If the buyer is requesting any closing cost credits, be sure to tell the lender if the buyer is a first-time homebuyer; lenders are more likely to agree to concessions for first-time buyers than for investors. 
4. Your lender will request a hardship letter from you.
   Make sure you handwrite it, and present your finances in the worst light. If you lost a job, had an illness or death in the family, are a senior citizen or have any other circumstances then let the lender know! Let them know that you are considering filing bankruptcy, and that this short sale would prevent you from doing that; because bankruptcy stops the foreclosure process cold, the lender would much rather approve your short sale than have you file bankruptcy. Also explain any facts that might make it harder for the bank to resell your house — anything that makes the bank grateful that someone has made an offer! 

    

5. Make sure your short sale package is impeccably thorough.
   At a minimum, the lender will want to see:

• The offer to purchase your home, including the buyer’s preapproval letter;
• Your hardship letter;
• A balance sheet listing your monthly income and expenses;
• Statements from your checking, savings and other asset accounts;
• A net sheet from your real estate agent listing all of the closing costs that must be paid for your short sale to close;
• Supporting documentation, including two months’ worth of paycheck stubs and all your bills;
• Your last two federal income tax returns.

Don’t make them have to come back and ask you for any of these items. Make sure the package is complete the first time your real estate agent sends it!

If one word can be considered a symbol of today’s market turbulence, that word is foreclosure. Over the last year, foreclosures have accelerated at a sometimes head-spinning pace as homeowners continue to default on their mortgage loans.

This in turn creates an investment opportunity as foreclosed homes as well as short sales flow onto the market. Like any other opportunity, investing in foreclosures has its advantages as well as its risks.

Risks and Rewards

Carrie Blair, a broker associate and foreclosure specialist with Denver-based Modern Real Estate, breaks the idea of foreclosure investment into three categories: short sales, public trustee/sheriff auction, and bank-owned/Real Estate Owned properties. 

Blair, who can be found online at www.InvestNowInDenver.com, says the three carry differing risk, but offer a similar reward: “You are able to buy a property below market value and have instant equity immediately following your purchase,” she says.

She says short sales carry less risk, but also less reward. “In a short sale, the lienholders are willing to take a short payoff,” she says. “The buyer can then buy the property slightly below market value.”

However, short sales will typically take several months to complete, so investors in this category must be patient and willing to risk the possibility that the bank may not issue approval. 

Blair estimates that only one of every three short-sale transactions ever close, with the remainder ending up at a county auction, known in Colorado as a public trustee sale or in all other states as a sheriff sale. Investors at these sales must arrive with certified funds – cash – for the total purchase amount. With lienholder bids posted the day before the auction, investors have a limited amount of time to evaluate the property’s exterior and it is bought as-is at auction, with liens and taxes attached.

“There is much higher risk (with these transactions) but potentially high reward if you can get the property with a big deficiency, since the bank bids substantially less than what it is owed,” Blair says. “Many times I will see investors buy properties at auction and successfully flip them with high profit margins. Then this successful investor buys a property with structural problems, has to then resell the property at a loss, and then all of his profit from his previous several deals get eaten up by one mistake. Buying at foreclosure sale is high-risk and is not for the casual investor.”

The third and most common category of foreclosure investment outlined by Blair involves buying bank-owned or Real Estate Owned (REO) properties. She says this type of investment holds the least risk in that the buyer is entitled to a inspection period and inspection objection, meaning that he or she can terminate the contract should the property not be found to be in satisfactory condition. These transactions also allow buyers to receive a clear and free title from the seller, provided all liens, property taxes, or anything else encumbering the property have been cleared.

“Buying an REO is very similar to buying a ‘normal’ property and has the lowest risk,” Blair says. “Many times the banks will put their inventory of properties on the market at highly discounted prices, below market value, because the properties are being sold as-is. You can buy an REO and have instant equity in your property. In 2008, I closed 39 transactions and about 80 percent of my business involved bank-owned properties.”

Foreclosure Investment Strategies

When first starting out with foreclosure investments, Blair says, it’s important to accumulate a wealth of knowledge about how to research available properties. Investors need to know where to find pertinent information along with making sure they’re paying the right price for a given property. She advocates finding a foreclosure specialist or mentor to help throughout the process.

“You need someone who is quick and reliable, accurate and knowledgeable, to help you get started,” she says. “There are certain strategies that work better than others. There is a lot of research to be done in a short amount of time. Most importantly, you have to be fast in buying the property. Speed is the key to success in buying a bank-owned property, and having an agent who is an expert in buying REOs is extremely important.”

Blair says good investors share a number of qualities. They understand the financials behind potential purchases and projected neighborhood appreciation and are not afraid to collaborate with trustworthy friends and colleagues who are experts in the field. They double- and triple-check their figures and are prepared to buy in transitional neighborhoods.

“Those who invest intelligently will continue to do well and find the good deals. As the fad of foreclosures loses steam, and the bad investors are weeded out, then the number of investors will shrink,” she says. “The future of foreclosure investing will remain strong for those who have the right skills.”