When Carol Joy and I started our business 15 years ago, we created a system of buying foreclosures that made $456,000 in six months. To this day, foreclosures make up 25 percent of the deals we close. I have spent a lot of time teaching my students how they should use foreclosures in their real estate investing strategies, and there are many misconceptions people have about what the foreclosure process is. In this article, I want to make sure everyone understands what foreclosure is and what the process looks like from beginning to end.
Stage 1 of the foreclosure process is what we call pre-foreclosure. This is when the owner of the property has fallen behind on their payments. There are federal laws in place that prevent the banks and mortgage companies from beginning the foreclosure process until the borrower is at least 90 days in arrears with their payments. If the account is not brought current, the lender moves on to the next step in the foreclosure process.
Substitute Trustee and Notice of Default
Once the lender, be they the bank or the mortgage company, pulls the trigger and officially begins foreclosing on a property, they hire a substitute trustee. The substitute trustee usually comes from what we call a “foreclosure millhouse,” which is a large law firm whose only focus is representing banks and mortgage companies to handle the foreclosure process. It’s the substitute trustee’s job to begin the foreclosure process, and they do this by having notice of default or a summons delivered to the property owner.
This summons is not delivered through the mail. It’s actually delivered by the deputy sheriff in person. They physically go the property and knock on the door. If someone comes to the door, they hand them the notice of default. If no one is there, the deputy sheriff will tape it on the door. At this point, the property is in foreclosure. Now, the borrower still owns the property. There’s a period of time after the notice of default during which the borrower can still make good on their payments and stop the foreclosure process.
In most states, the next part of the foreclosure process is what’s called a hearing. During the hearing, the clerk of court goes through a whole checklist to determine if the bank has the legal right to foreclose on this property. If they find that, yes, the bank can foreclose on the property, then they move forward to the next step.
Assuming at this point in time that the owner of the house has not brought their payments current, now comes the actual sale of the property. This will be a public sale that takes place on the courthouse steps. The same law firm or substitute trustee that is representing the bank will conduct the sale. The lender sets a minimum bid, and if there’s a buyer who makes that minimum bid and purchases the house, then the process is finished. However, if there is no buyer at the courthouse steps, then we enter the final stage of the foreclosure process.
If the owner of the house is not able to bring up their payments and no one buys the property at the public auction, then the property is taken back and becomes what we call “bank owned.” The bank will get in touch with a Realtor to sell the property through the multiple listing service (MLS).
A lot of students have asked me, “Jay, how can I contact banks and buy bank-owned properties directly from them?” Seldom is this an option for us real estate investors. You’re just going to have to wait until the property reaches the final stage of foreclosure and hits the multiple listing service.
There you have it, the foreclosure process from pre-foreclosure all the way to bank-owned property. Now, it’s worth noting that while you can’t buy a bank-owned property until it is listed with a realtor, there are different ways you should approach an owner in foreclosure and negotiate the deal, depending on what stage of the foreclosure process they are in. Be sure and watch for and upcoming article where I’ll explain how negotiation techniques and buying strategies change during the stages of the foreclosure process.