Rodolfo "Rod" and Carolina Jacobo

HOW MORTGAGE FORECLOSURES WORK If you want to buy a foreclosure property at a bargain below-market price, you need to know how foreclosures work. STEP 1¿LENDER RECORDS A NOTICE OF DEFAULT OR FILES A JUDICIAL LAWSUIT AGAINST THE DEFAULTING HOMEOWNER The first step in a foreclosure on a mortgage, deed of trust, mechanics' lien, income tax lien, judgment lien or homeowner's association lien is to record a notice of default or file a judicial lawsuit against the defaulting homeowner. Exact procedures vary in each state. The homeowner is given a reinstatement period in which he or she can attempt to cure the default. The speed of the actual foreclosure sale varies widely by state law. It can be as short as 21 days in Texas to as long as six to 12 months in a few states. Three or four months is typical for most states. During this first step of the foreclosure procedure, the homeowner is free to sell or refinance the property. This period can be a great buying opportunity for purchasers, but they should be aware that they will be buying the home subject to all existing encumbrances on the property. Some sellers just want a small amount for their equity. A student in my college real estate class described his own best foreclosure purchase. He bought a house from the defaulting owner for just $500 cash because the homeowner wanted to move in with her relatives in Louisiana. However, he bought the house subject to the $73,000 first mortgage, which he had to reinstate to prevent the foreclosure from proceeding to auction. STEP 2¿THE FORECLOSURE AUCTION The next step occurs when the reinstatement period ends. Then the foreclosure sale takes place. Depending on the type of mortgage, deed of trust or lien being foreclosed, the foreclosure auction might be conducted by a judge, sheriff, court referee or independent trustee. Foreclosure auction locations include courtrooms, the steps of city hall or even in front of the property. If there are no bidders at the auction, the foreclosing lender or lien holder usually submits a credit bid for the amount owed, plus legal fees and other foreclosure charges, and obtains title to the property. Bidders at foreclosure auctions should be aware they are buying the property subject to any prior existing liens, such as a first mortgage if the sale is being conducted by the second mortgage lender. If there is a recorded Internal Revenue Service lien on the property, the IRS has an automatic four-month redemption period after the sale during which it can buy the property from the high bidder for the amount paid. A major advantage of buying at the foreclosure auction is any junior liens, such as a second, third or fourth mortgage secured by the property, will be wiped out if the first mortgage lender is foreclosing. A major disadvantage of buying at a foreclosure auction is that cash is required. The auction is one place where credit cards aren't welcomed. STEP 3¿BUY AFTER THE FORECLOSURE AUCTION If you don't have enough cash to buy at the foreclosure auction, you're not out of luck. You might still get a bargain wholesale purchase price. If there were no bidders at the foreclosure sale, the foreclosing lender then would take ownership the property, wiping out any junior liens. I have had success by immediately sending an overnight letter to the foreclosing lender offering to buy the property for the amount of the defaulted loan and asking for seller financing. I address my letter to the lender's president. Of course, the president never sees it. But it does get to the right person who always replies, sometimes accepting my purchase offer and sometimes making a counteroffer. If the property was sold at the foreclosure sale to a high bidder, you might be successful by contacting that buyer. He or she might be an investor who wants a quick sale profit. That happened to me a few years ago when I bought a foreclosed house from the high bidder who didn't want to tackle the necessary upgrades. He just wanted a quick profitable resale. He even carried back the mortgage for me. BE CAUTIOUS OF VA AND FHA FORECLOSURES If you see a Veterans Administration or Federal Housing Administration foreclosure house advertised in the newspaper classified ads, be careful. These houses have already been through the foreclosure procedure and nobody bid at the auction. That's why the VA or FHA owns the houses and wants to sell it. Special mortgage finance terms sometimes are offered, but the asking price usually has been marked up to full market value. Most VA and FHA foreclosed houses are not bargains. HOW TO FIND FORECLOSURES Exact procedures for locating houses in the foreclosure process vary by community. Some local subscription publications list these properties. Ask local real estate lawyers, title insurers and real estate brokers for recommendations of the easiest way to locate foreclosures in your area.