What is a Foreclosure

When a homeowner quits making payments on their home (defaults on his/her loan), the terms of the Deed of Trust (also known as ‘mortgage’) permit the lender to ask the ‘trustee’ to file a ‘Special Proceeding’, letting the homeowner and the public know through posting at the county courthouse and through publication in a local newspaper that the lender will be auctioning the property to satisfy the debt incurred on the property. Generally, most lenders will not begin this process until a homeowner is at least 60 days late on their payments.

Lenders do not want to own property; they want the loans repaid. Frequently, a mortgagor (the homeowner) can contact the lender (mortgagee) and work out a plan to bring them back into compliance with the terms of their loan. If you are in danger of being foreclosed on, our best advice is to not be afraid to contact your lender.

On the auction date, the trustee for the lender will hold an actual auction on the steps of the courthouse of the county where the property is located. Following the auction, the mortgagor has 10 days to ‘redeem’ the property: pay off the mortgage or make some other arrangement.

If there is no higher bid than the lender’s bid, then the property reverts back to the lender.

When the property comes back to the lender, the ‘loan’ is ‘satisfied’, i.e. there is no ‘pay-off’ figure. The property now becomes known as REO, an accounting entry term for a profit and loss statement: Real Estate Owned. This property is not a ‘repo’ since the term ‘repo’ infers that the bank actually owned the property prior to taking it back, or ‘repossession’. This is not the case. The correct term to use is either foreclosure property or REO.

Once the property becomes REO, the bank contacts a local Realtor who determines occupancy, rekeys and secures the property, gets it cleaned up inside and out, and takes a lot of photos and measurements. This information is used to prepare a comprehensive Broker Price Opinion, letting the new owner of the property (the bank) know of all visible defects, problems and opinion of price, based on the market and other homes on the market. Frequently, the bank has at least one other BPO done as well as an appraisal by a state-licensed appraiser. The bank uses this information to set a price on the property. Previous owner’s loan amount has no bearing on pricing.

Since the bank acquired the property through the legal process of foreclosure, keep in mind that the bank has never seen the property nor resided in the property. Therefore, it will be sold ‘as-is, where-is’ with no representation of condition or compliance. The seller’s attorneys will do the title searches necessary to deliver a Special Warranty Deed to the buyer at closing, with no outstanding liens. Property taxes will be prorated to the day of closing.

Frequently, buyers and their agents feel that foreclosure homes are overpriced or that anything that they see ‘wrong’ with a property necessitates a reduction from the list price. Keep in mind that the bank has adequate documentation of property condition and market condition and has priced the property accordingly. Check out comparables.