Over the years you’ve probably heard agents or investors mention buying foreclosures, but that term can actually describe a few different types of transactions with the commonality among them being that the subject property is, or was, in some level of default. Let’s look at the different scenarios, sorted by length of default, that one can be referring to when discussing buying a foreclosure.
When a homeowner falls behind on payments the loan servicer will start reaching out in efforts to arrange payment (they hope) and get the past due balance brought current. Most people do not realize the amount of time the foreclosure process takes from the time of the first missed payment until the title is taken out of the homeowner’s name. It’s not uncommon for this process to take a year or so to completely run its course. Once default reaches a certain level homeowners receive communication from the substitute trustee, the law firm in charge of the foreclosure proceedings. Some homeowners will work with loan servicers and/or agents to complete property sales before foreclosures can be completed. Sometimes investors are able to find deals from sellers facing a time crunch related to foreclosure activity. While this scenario is referred to by some as buying a foreclosure, it’s actually best described as pre-foreclosure. A short sale is a type of pre-foreclosure sale as well.
The next scenario is one most accurately aligned with the phrase buying a foreclosure. It’s when the property finally makes it to the auction at the courthouse steps and interested buyers bid there or during the 10 day upset bid period following the auction. Winning bidders must pay an immediate deposit calculated based on the winning bid and close in relatively short order paying the remaining balance due from the winning bid.
Another situation under this umbrella is an REO (Real Estate Owned) sale. When the bank’s opening bid at a foreclosure auction is for an amount that does not compel prospective buyers to bid, the bank’s opening bid will be the high bid. Assuming there are no bids during the 10 day upset bid period, the property will go back to the bank. The bank then takes steps to market and sell the property. The bank sometimes does this with property titles they take from homeowners who have completed a deed in lieu of foreclosure. Buying an REO is purchasing a home that has, most often, recently completed the foreclosure process.
There are similarities between each of the aforementioned methods used to buy a distressed property. The next time you hear an agent or investor discussing foreclosure buying plans or strategies, keep in mind it could be a reference to any of the above. It can really help bring clarity to objectives and feasibility when defining what buying a foreclosure means in a particular circumstance.
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With this knowledge, now you can Rest Easy.