Insights on Foreclosure
By Michael “Mick” McGirr | Phocus Law
Can you think of a more unnerving word than “Foreclosure?” To some, it might mean the unfortunate end of their desperate struggle to keep their property. To another, it might be the foreboding process needed to recapture some portion of a loan gone bad. Either way, for real estate investors, it’s an important tool and a valuable opportunity for investment.
Foreclosure: What is it, and what does it mean for me?
Foreclosure, or the process whereby the lender reclaims property to recoup money from a defaulted loan, typically begins with a few months of missed financing payments or some other default under the loan terms. Usually, the lender will send notices by mail or by phone reminding the borrower of payments needed or to let them know they are at risk of default. The lender generally won’t claim the property immediately, as it is a lot easier (and cheaper!) for both parties if the borrower just catches up on their payments when they can. Reassessment of loan payments is common, as the lender and borrower negotiate a solution where the lender gets paid, and the borrower extends their ownership of the property.
However, if the borrower refuses to pay or continues to miss payments, the lender can then record the Notice of Default and Election to Sell. This also needs to be mailed to the borrower, any guarantor, and any other parties to the loan. After the requisite time passes, and if the borrower fails to redeem the property, the property is sold at a public auction and ownership transfers to the new owner. Most importantly, the lender receives the sale proceeds, up to the full unpaid amount of the loan. If, at auction, there are no bidders, through a creditor’s bid the lender can gain possession of the property directly, in which case the borrower’s debt is reduced by the amount of the creditor’s bid.
Borrowers do have some rights here, including that, until the day of the auction, they are able to pay the missed payments, as well as any fees incurred, and keep the property.
As an investor, a foreclosed property might be a good option for finding a deal. There are a few ways to purchase one:
Real Estate Auction: The fastest, cheapest way to ownership is to outbid everyone at an auction. However, it requires payment in cash, and you purchase the property as-is, meaning you might run into some unknown repair costs, additional encumbrances to the title, or other surprises.
From the Bank: You can also buy a bank-recovered property, which does take more time, costs more money, and can be less of a bargain. However, this way, you have more opportunity to inspect the home before choosing to buy, title policies are available, and there is, generally, more opportunity for you to feel secure in the purchase.
Pre-foreclosure: The first stage of foreclosure. Here, you can view the property and purchase it at a lower price, saving you money and keeping the lender from completing the foreclosure process. It can get complicated, however, and so navigate this process carefully.
If you are looking for counsel on navigating the foreclosure process as a lender or making sure you purchase a property safely out of foreclosure, feel free to reach out to Michael J. "Mick" McGirr, Esq. at Phocus Law for help. You can reach his team via email at [email protected] to get that process started.