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Investing in Foreclosure Properties: Understanding the Process
Posted on 06/14/2019 by GeoData Plus
The opportunity to purchase distressed properties is highly attractive as big discounts can be found, but not all the action happens on the day of the auction. Enterprising buyers learn about upcoming foreclosure sales and make efforts to purchase the property prior to the start of the auction. It’s important to know the basics of foreclosure investing before you get started. Each state has its own foreclosure process, but we’ve put together this quick guide to assist.
States follow one of two foreclosure processes
Judicial foreclosure is the process taken when a home loan is secured by a mortgage instrument. In a judicial foreclosure by sale, if the homeowner defaults on the payment to the lender, the lender must file a law suit with the courts. This is known as a lis pendens (giving public notice that a lawsuit is pending on the property). The homeowner is also sent a notice of default. The court will determine if the foreclosure can proceed. If it does, the homeowner is typically given a set period of time to cure the default, known as a redemption period. If the homeowner cannot make the loan current, the court will send a notice of foreclosure sale to the homeowner, proceed to schedule the auction, publicize the time and starting bid amount. Once the house is sold, the new owner receives title to the property by means of a sheriff’s deed.
Strict foreclosure is another form of judicial foreclosure. However, if the homeowner fails to pay, the court awards ownership of the home to the lender, thus avoiding an auction on the courthouse steps. This results in the property becoming an REO (real estate owned) or bank-owned property. There are only two states where strict foreclosure is practiced: Connecticut and Vermont.
Non-judicial foreclosure is the process when a home loan is secured by a Deed of Trust with a “power of sale” clause. The lender does not hold the deed of trust, rather a third-party known as a trustee does. The lender can start the foreclosure process without the court’s involvement by notifying the trustee. The trustee then will issue a notice of default, which becomes public record. Similar to a judicial foreclosure, the homeowner is usually given a certain amount of time to cure the default. If the homeowner cannot make the loan current, the trustee will proceed with the auction, recording the time and bid amount publicly. Once the house is sold, the title is transferred to the high bidder by means of a trust deed.
The above information has been simplified for purposes of this article. For more detailed information on the foreclosure process, refer to the foreclosure laws for your state.
Why are there different types of foreclosure?
Because there are different types of securities on real property, the process of foreclosure varies. If a person’s loan is secured with the lender by a mortgage document, there are two parties involved – the borrower and the lender. The lender must go through legal action to obtain a judgment for the foreclosure. If a person’s loan is secured by a deed of trust, there are three parties involved – the borrower, the trustee, and the lender. The trustee, an impartial third party, acts as the holder of the deed and can initiate the foreclosure process.
Both of the documents function the same – to secure repayment of the loan by placing a lien on the property.
It’s important to know your state’s process
If you are wanting to work with distressed properties, you will need to know if your state uses judicial proceedings or non-judicial proceedings so that you understand the process timeline. In judicial states, the process can take much longer than in non-judicial states simply because the courts are involved. Judicial foreclosures could take months to years, while non-judicial foreclosures routinely take only a few months.
According to auction.com, the entire non-judicial process in the state of Georgia could take as few as 37 days. According to nolo.com, Indiana had the longest foreclosure timeline in the first quarter of 2019 – 1,806 days. According to the New York State Department of Financial Services, the time between the conclusion of the mandatory settlement conference and the entry of a judgment of foreclosure and sale is approximately 430 days. However, as real estate practitioners know, in real life, those numbers are often understated.
How do I find out what my state’s procedures are?
Some states allow both processes but primarily follow one or the other. As noted above, It’s important to check with your local county government to find out details of the foreclosure procedures. The map below can help you get started.
How GeoData Plus can help
Timing is important when investing in foreclosure properties. With GeoData Plus, you can access our up-to-date distressed property database that includes pre-foreclosures (lis pendens) as well as foreclosure auctions in nearly every state. You can also use the comparable search tool to help you determine the value of a property prior to an upcoming auction.
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