Proceeding to the Foreclosure Sale

Prior to the foreclosure sale, the homeowners can work with the lender or their attorney to delay or cancel the foreclosure sale. In other words, just because you see a foreclosure notice in the local paper doesn’t mean that if you show up for the sale, that property is going to be auctioned off. Calling the attorney in charge of the foreclosure prior to the sale is a great way to find out if the property is going to be offered at the sale. The attorney’s name is usually listed on the foreclosure notice. At the foreclosure sale, you have an opportunity to bid against other investors for any properties being auctioned off. Some auctions have open bidding, whereas others use a sealed bid system. However your county chooses to hold its auctions, a few words of advice can assist you in acquiring properties and not losing your shirt:

• Sit in on at least five auctions before bidding to get a feel for the process and gather information.
• Research the property thoroughly before you bid.
• Buy only senior liens (first mortgages). You can really get burned buying junior liens because foreclosure typically wipes these off the books. When you have more experience and knowledge, you can start working the junior lien circuit and tax liens.
• Set a maximum bid and never ever exceed that amount, no matter how juiced up you get at the auction.
• When you plan to bid, show up with a cashier’s check. Most auctions require payment at time of purchase or within an hour.

The Notice of Default

For investors, the foreclosure process officially kicks off with the posting of the Notice of Default (NOD) or foreclosure notice in the county’s legal newspaper or the local newspaper — private, for-profit publications that get the word out to prospective bidders. At this point, the distressed homeowners usually realize the inevitability of losing their property. Some remain in denial while others become resigned to the fact, even though they may have several options to abort the foreclosure process and regain control of their property . . . and their finances.
If you plan on purchasing properties prior to the foreclosure sale, your best chance is to contact the homeowners before the NOD is posted. After the NOD appears in the papers or in legal publications, competition for the property begins to heat up. The only way to find distressed homeowners before the NOD is posted is through word-of-mouth networking.

Exploring the Missed-Payment Notice Stage

Some lenders initiate foreclosure proceedings as soon as the homeowners miss one or two payments. Other lenders start sending reminder notices, often following a predictable timeline:

• Two-week notice: Some lenders give homeowners a two-week grace period, after which they begin to start calling the homeowners or sending them letters.
• 30-day notice: When a payment is so late that it’s time for the next payment, the lender gets a little jittery and ramps up its efforts. The lender may even begin levying late payment fees.
• 45-to-60 days’ notice: Unless the homeowners contact the lender and work out some new payment agreement, the lender typically sends out a certified letter insisting that the homeowners pay up.
• 90-day limit: If the homeowners still have not contacted the lender or shown any commitment to make good on the loan, the lender typically initiates formal foreclosure proceedings.

At this point, the lender transfers the matter to outside legal counsel (an attorney), and the attorney in charge has a foreclosure notice (sometimes referred to as an NOD or Notice of Default) posted. Once the attorney starts foreclosure by advertisement, these legal notices or advertisements attract the investors. The missed-payment notice stage, prior to the start of foreclosure proceedings, is the best time for homeowners to act and the best time for you to step in to assist them. In 90 percent or more of the foreclosures I’ve been involved in, the homeowners’ best option is to sell the property, cut their losses, and find more affordable housing. With your assistance, the homeowners still have time at this stage to take advantage of this option.

Identifying the Foreclosure Process in Your Area

The end result of foreclosure is that the homeowners lose ownership and ultimately lose possession of their property. That’s true no matter where you’re buying foreclosure properties. However, different states and counties follow different foreclosure procedures. The two main procedures are:

• Foreclosure by trustee sale or foreclosure by advertisement
• Foreclosure by judicial sale or judicial foreclosure

The following sections describe these two types of foreclosure. To find out which process your state follows, check the appendix at the back of this book. Counties may also have their own local rules for how the sale is actually carried out, so visit your county courthouse (the Register of Deeds office), and ask them to explain the rules and regulations. I also recommend that you sit in on a few auctions before bidding on anything.

Foreclosure by trustee sale
A few more than half the states follow the trustee style route. When the homeowners purchase a property in one of these states, the county issues a sheriff’s deed that the trustee (which may be the sheriff in some areas) holds in trust until the mortgage is paid in full. After paying off the mortgage, the trustee releases the deed to the homeowners.
If the homeowners default on the payment, the lender can notify the trustee to initiate foreclosure proceedings. The trustee can then sell the property and transfer proceeds to the lender as payment of the loan. Because the foreclosure does not need to progress through the courts, foreclosure by trustee sale is typically much faster than foreclosure by judicial sale.

Foreclosure by judicial sale
Fewer than half the states follow a judicial foreclosure process. As you’ve probably guessed, judicial foreclosure passes through the justice system —the state (circuit court) or district court. When the homeowners default on their mortgage, the lender files a claim to recover the unpaid balance of the loan from the borrowers. The courts decide the case, which typically takes a long time to resolve — typically 4 to 6 months, but sometimes up to a year. During this time, unless the homeowners work out a payment plan or some other solution with the lender, they’re almost guaranteed to lose their home.

A common foreclosure myth

A common foreclosure myth is that it’s a one-time event. Homeowners miss a mortgage payment or two, and the lender swoops in and scoops up the property. The fact is that foreclosure is typically a long, drawn-out legal process that begins with missed payments, proceeds through some sort of legal system, and often results in homeowners losing their homes. An understanding of the foreclosure process reveals the various stages at which you can purchase properties. By knowing what to expect, you can often diminish disappointment and maximize your opportunities.
Anywhere along the way, the homeowner has options to interrupt the process and regain control of the property. I point out these opportunities so you can better assist homeowners in making choices and to give you a heads up of what a homeowner can do to derail your purchase plans. Homeowners find themselves facing foreclosure for any number of reasons, including long-term illness or disability, overspending, substance abuse, divorce, and gambling, to mention only a few. As a real estate investor, you gain nothing by judging people in foreclosure. The best way to approach homeowners in foreclosure is with respect and empathy. By enabling homeowners to put the past behind them and establish a more solid financial footing, you may place them on a more productive path.