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Ben Richardson,
Realtor®
Broker/Owner
CalBRE #01075312
(530) 305-1593
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Forclosure Process

What is a foreclosure?
A foreclosure is when a lender takes ownership of a property because the borrower is not making their payments. This seems simple enough, but the process itself can be fairly confusing. In California, after 120 days late on a payment, the Notice of Default is posted.

Notice of Default
The process officially begins when the lender records a Notice of Default against a property. This document states that the borrower is in default (has not made payments) and it specifies how much money must be paid to bring the loan current. At this point the borrower has three months to either pay the money due or make arrangements with the lender. If this does not happen, the lender can then record a Notice of Trustee's Sale (The lender must wait at least three months before recording this document. Sometimes they may wait longer).

Notice of Trustee's Sale
A Notice of Trustee's Sale is essentially the borrower's last warning that they may lose their property. This document will state the default amount along with the scheduled date and time of the auction. After recording this document, the lender must wait a minimum of two weeks (14 Days) before they can sell the property. Once all the time requirements have been met and the borrower still refuses to make arrangements for payment, the lender can then record a Foreclosure Deed. However, an advertisement in a newspaper must be run for 21 days before the sale, so the reality is that it's 21 days from the NOD period.

Foreclosure Deed
Once the foreclosure deed is recorded, the borrower has lost all ownership in the property. If the property was sold at auction, the lender normally records the Foreclosure Deed concurrently with the Grant Deed to the new owner. If the property was not sold at auction, the lender would simply record the foreclosure and probably sell the property on the open market. Each lender processes foreclosures differently. Some lenders have a very bureaucratic system of processing these, others don't. Not all lenders process them a fast as others. You may have to wait one year for a property to come on the open market.

Risks Involved
There are many serious dangers in purchasing a foreclosure property. First of all, when a property is bought at auction, it is done so "as-is" and without inspection or warranty. In other words, the property could have serious problems or damage without you knowing about it and you inherit those problems as the new owner. Also, if the previous owner had any tax liens, the corresponding government agency (state or federal) can seize the property even after you have purchased it.

What Happens If There Are Multiple Loans?
The only time a property is sold "free and clear" at auction is if the defaulted loan is the 1st Mortgage. To illustrate how the position of a loan effects the ownership, we will examine a hypothetical situation:

Joe Jones has three mortgages against his house. The 1st mortgage is for $100,000, the 2nd is for $20,000 and the 3rd is for $10,000. If the 1st mortgage were foreclosed on, the 2nd and 3rd would be lost (these two lenders would lose their money) and the purchaser would own the property "free and clear" (no mortgages). But what happens if Joe defaults on his 2nd loan? When this mortgage is foreclosed on, the 3rd loan would be lost, but the 1st would still be active. The person who purchases the property at auction would be responsible for taking care of the 1st loan. If the 3rd loan is foreclosed, then responsibility for both the 1st and 2nd would be assumed by the new owner.

Payment
The final not on foreclosures is that a property bought at auction must be paid for with cash. Many people appear to believe that you sign a contract at auction and then go get a loan, but this is not true. They want money at the auction, no financing. Usually buyers bring multiple cashiers checks, in varying amounts. If the sale price at auction is $101,000, you better have at least that with you at time of auction. You will be reimbursed for any additional amounts within a few weeks.

Title Insurance
Some Title Companies will not issue a title insurance policy on a foreclosure purchased at auction, for up to one year after auction. Twenty percent of foreclosures end in law suits. That may be why some title companies don't want to insure them. Some title companies do provide title insurance.

Bank Repo's (REO's)
This may be the best way to buy a foreclosed property. Least risky. You can inspect the property prior to purchasing. You can get title insurance. You can get financing, depending on your credit. If the property did not sell at auction (Trustee's Sale) the lender will take the property back. It could take a year for the property to make it to the open market. Lenders are not emotionally tied to these properties. It is very difficult to buy a property prior to the property being on the open market (listed for sale by a real estate company). Once the property is listed for sale by a Realtor, it's just like buying a normal property. How do you find REO's? Call Ben at 530-305-1593.