Foreclosure. What does it mean exactly? According to Google dictionary, foreclosure is:
The process of taking possession of a mortgaged property as a result of the mortgagor’s failure to keep up mortgage payments.
Well stated. Foreclosure is a process, something that happens to a property, not what the property becomes. It really bugs me when I hear someone say, “I want to start buying foreclosures.” Really, you want to buy a process? I’d much rather buy a house. There are three phases in the foreclosure process:
- Pre-foreclosure – the period of time between when the lender officially informs the homeowner they are in foreclosure and the actual auction date for the property. In Arizona, for example, homeowners have 90 days from the day they receive their foreclosure notice (notice of trustee’s sale) to either bring their loan current or pay it off. If this doesn’t happen the lender may foreclose on the 91st day.
- Foreclosure Auction – If the homeowner fails to bring their loan current, or pay it off, the lender will foreclose. In many states, these auctions take place at the courthouse steps. If the opening bid of the property is low enough the home will sell to the highest third-party bidder. These bidders are usually private investors looking to fix and flip or buy and hold. However, more and more people are buying their primary residences at the auction.
- Real Estate Owned (REO), Bank or Lender Owned – A home in foreclosure will end up in the hands of the bank if no third-party bids. This happens a lot because lenders usually set the opening by adding the past due payments, late penalties and interest to the original principal mortgage balance of the loan. Because property values have dropped significantly after the crash, most homeowners owe more than their homes are worth.
You probably noticed that short sales aren’t included in the three phases of foreclosure. There are two reasons for that:
- A homeowner doesn’t have to be in foreclosure to do a short sale.
- If a homeowner is in foreclosure and is doing a short sale then it’s considered a pre-foreclosure because the bank hasn’t foreclosed on the property yet.
Now that you’ve read this post you’ll avoid ticking me off and sound a lot smarter around your friends. You can make intelligent comments like, “I plan to invest in pre-foreclosure properties.” Or, “Because I have significant cash reserves I plan to purchase homes at foreclosure auctions.”