Foreclosures - Frequently Asked Questions
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What is Foreclosure?
Foreclosure is the legal process that allows a lender to recover the amount owed on a defaulted loan by selling or taking ownership (repossession) of the property securing the loan.
The foreclosure process begins when a owner defaults on the mortgage loan payments and the lender files a public default notice, called a Notice of Default. When the process is complete, the lender will sell the home to pay off its mortgage and any legal costs.
How Does a Home Go into Foreclosure?
Foreclosure proceedings usually begin after a borrower has missed 2-3 mortgage payments. The lender will then record a notice of default against the property. Unless the debt is satisfied, the lender will foreclose on the mortgage and proceed to set up a trustee sale.
What Types of Foreclosure are There?
There are two types of foreclosure that are allowed in the state of California - Judicial Foreclosure and Non-Judicial Foreclosure.
Judicial Foreclosure is very rare in California and requires the lender to sue the owner in foreclosure and proceed with a trial in a court of law. The owner has the right of redemption allowing them to buy it back from the successful bidder at auction for 1 year after the sale.
Non-Judicial Foreclosure is what most people are referring to when they talk about "foreclosure" in California. This type of foreclosure is often referred to as a "Trustee Sale," as the sale is handled by the trustee appointed in the deed of trust. This is the preferred process in California because it takes place much quicker than a judicial foreclosure.
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How Fast Can a Foreclosure Happen?
In California, it’s typically a non-judicial procedure that usually takes just under four months from the filing of a Notice of Default - unless a lender is willing to negotiate and extend deadlines. Otherwise, the lender will foreclose on the mortgage and proceed to set up a trustee sale.
What Happens at a Trustee Sale?
Trustee sales are advertised in advance and require an all-cash bid. The sale is usually conducted by a sheriff, or lawyer acting as trustee. This kind of sale, which usually attracts savvy investors, is not for the novice. In a trustee sale, the lender who holds the first loan on the property starts the bidding at the amount of the loan being foreclosed. Successful bidders receive a trustee's deed.
What are Problems Buying Foreclosures at a Trustee Sale?
Buying directly at a legal foreclosure sale is risky and dangerous. It is strictly caveat emptor (“Let the buyer beware”). The process has many disadvantages. There is no financing - you need cash and lots of it. The title needs to be checked before the purchase or the buyer could buy a seriously deficient title with unknown liens against it. The property's condition is not well known and an interior inspection of the property may not be possible before the sale. In addition, foreclosure sales are exempt from some of the state disclosure laws.
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What Happens if a Property Doesn't Sell at a Trustee Sale?
Few foreclosures actually end up being sold at the Trustee Sale. If the property does not sell, it goes back to the bank and becomes a Bank Owned Property, also known as REO (Real Estate Owned). The REO property is typically property that had a balance equal or greater then the value.
What About Buying a Bank Owned REO "As Is"?
Bank Owned REO homes are sold "as is," meaning limited repairs have been made and no structural or mechanical warranties are implied. The bank typically will not complete any additional repairs on the property, but they may be willing to offer the buyer a "repair credit" to cover any repair costs. Because the bank never lived in the property, they are also exempt from issuing a Transfer Disclosure Statement. It is therefore especially important that you do a good physical inspection of the property and hire a professional home inspector to thoroughly go over the property.
What Can I Do to Get the Bank to Accept My Offer?
If you want your offer to be accepted, be prepared to make a reasonably priced offer and move fast. Banks like a quick escrow. They will typically counter your offer with an addendum to the purchase contract that speeds up the process and takes away some of the buyer contingencies rights. The bank may also make verbal counter offers to speed up the process, and put it in writing when the deal has been agreed to.
Make sure you have your loan in place when you make an offer. The bank is keen on knowing that the buyer's financing is solid. Make sure to include a pre-approval letter with your purchase offer.
To increase your chance of acceptance, make your purchase offer as clean and easy to read as possible. The fewer demands or exceptions, the better. Also understand that the bank will choose the title and escrow companies, as they are doing many of these transactions with the same escrow company.
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What About Buying a HUD Foreclosed Home?
The U.S. Department of Housing and Urban Development acquires properties from lenders who foreclose on mortgages insured by HUD. You can only buy HUD-owned properties through a licensed real estate broker. Down payments vary depending on whether the property is eligible for FHA insurance. HUD homes are sold “as is,” meaning limited repairs have been made and no structural or mechanical warranties are implied.
What is the Difference Buying a Bank-Owned REO vs. a Short Sale?
REO stands for " Real Estate Owned," and is another way to refer to a "Bank Owned" property. This is property that the bank has taken back through foreclosure and failed to sell at the trustee sale. These properties are also known as Bank "Repos."
A Short Sale occurs when a seller who is behind in his payments attempts to sell his house before the bank takes the property through foreclosure. To do this, the Real Estate Agent negotiates with the bank to accept less than what is owed on the property. This is known as a Short Sale.
With a Bank Owned REO, the bank is the owner and makes all the decisions regarding the sale. They typically sell the properties "as is" and with minimal disclosures. REO properties are vacant and once a deal is agreed to, the sale takes place quickly.
With a Short Sale, the homeowner is still technically the owner of the property and must agree to the sale terms in addition to the bank approving the deal. In a Short Sale, the seller is still typically living in the property and will issue all standard transfer disclosure statements. Short Sales take a little longer than an REO to obtain an approval from the lender and to complete the escrow.
Buying Bank Owned REOs or Short Sales both represent opportunities to get a Great Deal on a home.
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