At least once a week I get an inquiry from a potential buyer about a foreclosure. It seems our industry has done a poor job of educating the public of how the foreclosure process works and how someone can actually capitalize on it.
The process starts with the first missed mortgage payment. Usually you’ll have a grace period of a week or two, and then the mortgage company will likely start hounding with phone calls. They will also send you a delinquency notice in the mail, which demands the mortgage payment, plus a penalty or they will enact their right to accelerate the debt. All mortgages have slightly different “acceleration clause” terms. These clauses state how many days late the payment can be before they make the entire balance due and can start the foreclosure process; usually between 30-90 days. Shortly after the first letter, the bank sends a Notice of Intent to Foreclose (NOI) via certified mail.
After at least 90 days of delinquency and at least 45 days after the NOI the bank will contact the local jurisdiction and file a “Order to Docket” (OTD). It is now public record that the mortgage will be accelerated and property will be foreclosed. Often this is also when your “sale date” is posted at the property. This is the public record that many websites scour and the property will be then be listed as a “pre-foreclosure” on sites such as Zillow.com.
A foreclosure sale will always occur at the local courthouse. Usually on the front steps. However, it can take months from the OTD to a foreclosure sale. This is when owners have the opportunity to utilize a short sale.
If it makes it to the courthouse steps for auction, it’s not as simple as going, bidding and buying. The bank has an interest in buying the house at foreclosure, which seems counterintuitive, but in order to receive a claim settlement from a mortgage insurance company they have to purchase the property themselves. Therefore if you go to bid, there may be the bank representatives in attendance and are likely willing to pay much more for the property at the courthouse steps than the general public.
Once the bank has taken ownership and recorded the deed, they will evict any parties still living in the property and put the home into their “Bank Owned” inventory. It becomes a liability on their balance sheet and it is unpredictable when each house they own will be listed for sale as “Bank Owned” or “Real Estate Owned (REO)” property. This is when the general public can purchase the home.
However, just as there is competition from the bank at the courthouse steps, there is competition from investors for REO properties. This is because once a bank decides to unload the property as a liability it prices the property below the market price.
In summary, be sure you know the difference between a short sale, pre-foreclosure, foreclosure and bank owned properties. There is a distinct difference to a potential buyer. I’m here to help in anyway I can, whether it is explaining the differences, selling a short sale, or helping you buy a REO property.