How Foreclosure Works
Foreclosure is the extinguishment of ownership and rights over a property in order to sell it for the purpose of paying a debt. For this to happen, the following must be true:
1. The debt must be collateralized by the property to be sold.
2. The debt must be in default. This means payments are not up to date.
3. The creditor must fulfill the legal requirements of the state were the property is located.
Contrary to common homeowner belief, the bank does not own the home. Unlike an auto or boat loan (where the bank’s name is on the title), real estate is owned by the borrower. The property is collateral to the loan. "Foreclosure" is not "repossession". Foreclosure does not happen immediately after an owner is late on the mortgage payment. The foreclosing creditor must take specific legal steps. Each state has different laws governing the foreclosure process.
Foreclosure is the culminating event of a legal process. This is the foreclosure process. A property is not foreclosed until it is sold at auction and as per the state’s foreclosure process. That "the lender is foreclosing" or that a "property is in foreclosure" really means that the lender has initiated and is proceeding through the legal process to foreclose a property.
Typically, as soon as there is a default, the lender initiates a collection process. This is known as the collections period. This is the best moment for a homeowner in default to reinstate and bring the payments up to date. The length of this collections period varies with each lender. However, generally speaking, if after three months the homeowner has not resolved the situation, the lender takes more drastic steps.
The foreclosure process starts if the creditor fails to collect. The foreclosure process always starts with a legal notice to the owner stating that if the loan is not paid or reinstated within a period of time, the property will be sold at auction in order to pay the debt. This period is known as pre-foreclosure. The length of the pre-foreclosure stage depends on the state’s law. The owner has until the foreclosure date to resolve the default. Solutions for resolving the default range from reinstatement (bringing the loan current by catching up on past due payments), refinancing, paying off the debt in full, or the selling the property to another party in order to satisfy the debt. If none of the above happens by the auction date, the property will be sold to the highest bidder. Foreclosure is this short and specific event. The proceeds from the debt are used to pay the creditors. Anything left belongs to the owner of the foreclosed property.
Troublesome foreclosures happen when properties are over-mortgaged. In other words, the amount of money owed exceeds the value of the property. In these situations, the only way for the property owner to get out of debt (other than paying the debt) is for a short sale to happen prior to foreclosure.
Over-mortgaged properties are common. This usually occurs when second, third and sometimes fourth mortgages are taken out on a property. Liens are another reason. 100% financing is another source of this problem. 100% financed properties rapidly become over-mortgaged if there is a default, because if the owner stops paying, the debt on the property will usually increase faster than the property’s appreciation. In addition, once the owner is in default, usually taxes, homeowner association fees and even utilities get neglected. Furthermore, and very commonly, maintenance is deferred and the property quickly starts becoming less valuable.
Sometimes accumulated debt can exceed 130% of the property value. In a pre-foreclosure situation, these secondary mortgages are at the mercy of the lender who is in first position. They worry about the chances of recovering their money if the first mortgage holder forecloses and the property sells at the auction for a low amount. The subordinate lenders are often willing to negotiate discount prior to foreclosure in order to mitigate their losses.
Knowing the foreclosure process is a critical component in pre-foreclosure investing. Oscar’s Short Sales A-Z seminar provides detailed knowledge on every aspect leading up to foreclosure. This knowledge is invaluable for investors, real estate brokers and mortgage brokers engaged in short sales.
WHAT IS A SHORT SALE?
A short sale is the sale of a property, with the authorization of the creditors, for less than what is owed on it. Short sales are done all the time. Whether it is the forgiveness of debt owed by a nation or an individual, it simply means that someone is willing to settle for less than what they originally anticipated. It’s part of business. All lenders know that they will not win all the time. Risk and loss of capital is an anticipated cost in the lending industry. Changing economic conditions, conflicts, and Mother Nature are among some of the many causes of unforeseen situations that turn good lending contracts into bad. In the context of foreclosure on secured assets, a short sale occurs when debtors agree to settle their liens for a known amount of money as opposed to taking a chance at auction. Auction prices are often unpredictable and usually greatly discounted. Many lenders are willing to mitigate further risk of loss by making deals before auction. Bad debt is sold by lenders all the time. For instance, there is a huge market for unsecured credit card debt that is sold for pennies on the dollar to collection agencies. That’s self-effectuated short sales. Lenders are more than happy to discuss resolution of aged debt. Their business is to lend capital, not dispose of foreclosed assets.
HOW CAN EVERYONE WIN?
Bad feelings are often associated with respect to people making money over the misfortune of others. There are countless scams in the finance industry that prey on vulnerable people. These scammers rush in and get out quickly. They don’t build long term viable businesses that are good for a community. Contrary to what many think, there does not have to be a big loser in order to make money in the foreclosure business. It is a matter of choice. A valuable service can be provided that benefits both the property owner and lenders. People with predator mentality do not last long in this business. Oscar’s teaching is about being rewarded for helping others, not about taking advantage of people in distress.
Undoubtedly, the issues leading up to foreclosure are stressful and potentially volatile for all parties. Unforeseen underlying problems often exist. A professional in the foreclosure business mediates a settlement that all parties can move on. In a short sale, the lender has agreed to settle the matter without further claims, and the property owner clears their obligations without the lingering negative effects of a foreclosure and subsequent garnishment of additional monies that auction did not bring. The professional will be thanked by all of the parties involved. Most importantly, the professional will earn a good financial reward.
WHAT’S IN IT FOR REAL ESTATE BROKERS?
Knowledge of pre-foreclosure investing can greatly expand a real estate broker’s earning potential. In today’s markets, it is critical to understand properties in foreclosure.
The benefit of becoming well versed in foreclosure is being one of the few who are able to understand such transactions. Most real estate brokers do not want to work with or do not understand such listings. Because of this, it is easier to directly obtain listings or obtain listings referred by other real estate brokers. Many successful careers have been made out of this misunderstood market segment.
Short Sales A-Z is a fully-accredited course for foreclosure education in the state of Oregon, Nevada, Washington, Idaho and California.
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WHAT’S IN IT FOR MORTGAGE BROKERS?
Mortgage brokers are usually the first ones to know when a person is unable to keep up with mortgage payments. The first impulse of homeowners in such a situation is to refinance. Often it is the case that the homeowner is not "re-financeable". Mortgage brokers well versed in foreclosure and short sales can offer the homeowner the alternative of selling the house even if the property is over-mortgaged. This way the homeowner avoids being foreclosed and the mortgage broker obtains the property at a good price. Later, when the homeowner is ready, the mortgage broker can finance the homeowner when buying a new home.
WHAT’S IN IT FOR REAL ESTATE INVESTORS?
Knowledge of short sale investing gives the investor an edge in the highly competitive real estate market. Investing is all about getting an edge on the competition and making healthy profits. For the investor willing to do the groundwork, profits can be made without putting any of one’s own funds or credit at risk.
Pre-foreclosure investing is one of the best-kept secrets in the real estate financing market today. Dominating short sales is an essential skill for pre-foreclosure investing. This kind of investment is not a convoluted get-rich-quick scheme based on optimized hypothetical markets. Short sales practices have been here since mortgages were invented by the Babylonians more than 4000 years ago. Deals are everywhere for those who are trained to identify them. Short-sales practitioners will always be needed as an alternative to expensive and risky foreclosure proceedings. Short sales acquisition strategies work best on over-mortgaged properties. And guess what, there is a plethora of over-mortgaged properties in almost every market on the West Coast. Through Oscar’s Short Sales A-Z seminar, you will learn the nuts and bolts from sourcing to executing successful pre-foreclosure transactions.
