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3 Types of Foreclosure Explained

Written by Posted On Tuesday, 17 December 2019 06:31
Knowing The Three Types of Foreclosures. Knowing The Three Types of Foreclosures.

3 Stages of Foreclosure

Do you know about the different stages of foreclosure? Foreclosures are a very distressing time for the homeowner. They have fallen on hard times, and their mortgage payments have become overdue. This is a nightmare situation for the owner, which could leave them with a damaged credit rating and a significant dent in their finances.

This situation does offer an opportunity for an investor to pick up a property for below market value. An investor stepping in can also help the homeowner avoid foreclosure and could protect their credit rating. Understanding how to buy a foreclosure, however, is critical. A significant percentage of buyers think about one thing - the bargain they will be getting. Doing this is a mistake that is often regretted.

There are three steps in the foreclosure process where an investor can realize high returns. Let's take a look at the three types of foreclosures.

Pre-Foreclosures

A pre-foreclosure is when the property owner has fallen behind in their mortgage payments and been informed that the lender intends to pursue legal action. The lender wants to recover their money and will start foreclosure proceedings if the debt isn't paid.

The homeowner will get a notice of default when they have gone, typically, 60 to 90 days past due on their mortgage payment. The bank will then give them a period to pay the debt owed. If they are still unable to catch up on their payments, the lender may decide to proceed with the foreclosure legal filling.

The homeowner can get out of this situation by paying the debt or selling the property. They will avoid damaging their credit rating if they can sell before the foreclosure begins. Investors can get a good deal on a distressed home in this situation, and the seller can benefit from not going through foreclosure. Quite often, homeowners will attempt to go through the process of a short sale.

Short selling a home is whereby you get the lender to accept less than what is owed on the mortgage. In situations such as these, the owner's goal is to get complete debt removal. Lenders, however, don't always agree to altogether cancel a debt. Quite often, however, they will settle for pennies on the dollar. The homeowner will sign a promissory note for significantly less than what they owe. On occasion, lenders also accept a small payoff at closing to settle the debt.

Houses for sale in pre-foreclosure can be found through attorneys and accountants as well as real estate agents. There may also be foreclosure notices in the local newspaper; though, of course, these houses may not be for sale.

Foreclosure

When the debt still hasn't been recovered by the lender, things move on to foreclosure proceedings. When this happens, it is possible to find properties through the County Clerk's office, where they will have the notices of default.

Interested investors may be able to leave their contact information so that they can be informed with a list of pending defaults. It may also be possible to get this information through title insurance companies, as they will be interested in future business from investors of distressed properties.

The way the foreclosure operates will depend on the state. It will either be a judicial or non-judicial foreclosure. The judicial proceedings, which are applicable to mortgages, will take longer than non-judicial.

A non-judicial foreclosure happens when a trustee, usually a title company, is involved. The trustee will take care of the foreclosure process once it is clear that the homeowner has defaulted on the mortgage.

When either judicial or non-judicial steps have been concluded, the property can be auctioned. Here is what you need to know about buying a home at auction. It should be made abundantly clear that purchasing a house at auction comes with significant risks. Read about them in the article at Maximum Real Estate Exposure.

When buying a home at auction, you will want to be prepared financially.

Post-Foreclosure

When the auction has concluded, the property will either have a new owner who won the bidding, or it will become bank-owned if it doesn't sell. If the auction is unsuccessful, the home will then be the responsibility of the bank's Real Estate Owned department. The bank will then decide what to do with the REO.

Having REOs on their books doesn't look great for the bank. Not only is it tying up their money, but it shows that they have made bad lending choices. The longer the bank holds on to an REO, the more property management expenses they are likely to incur. This makes it possible to pick up a good deal on a bank-owned home, check the foreclosure notice to find out who the lender is. In this situation, they will be eager to sell, and this gives investors a great opportunity.

It may still be possible to buy the property - albeit at not such a good price - if it has been purchased at auction. If a private investor owns the home, you may still be able to make an offer, but the likelihood of a really low price is reduced.

Quite often, when bank-owned homes are listed with a real estate agent, if not sold after thirty-days, an aggressive price reduction will be made. Here are some excellent tips for buying a foreclosed home. Being prepared and ready to go is vital when looking to purchase bank-owned homes.

Deciding When to Invest

Investing in foreclosed properties does involve more risks than other real estate purchases. If you are interested in the terrific deals available, you should focus and become an expert on one of the foreclosure steps discussed. This will allow you to avoid more of the potential pitfalls and make the most of the investment opportunity for the long term.

When buying distressed properties, investors need to be more careful about avoiding common mistakes. It cannot be emphasized enough that you should have a well thought out game plan in place.

If you are a first-time investor, you need to make sure you can handle the work required at the property. Distressed homes are often neglected by their previous owners. Buying a fixer-upper is one thing, getting involved with a rehab property is another if you don't have the qualifications. Make sure you understand the difference between a rehab home vs a fixer-upper. Don't bite off more than you can handle.

Final Thoughts on Foreclosure Types

Hopefully, you now have a better handle on the three types of foreclosures. Whether you are an investor or buying your first property it is essential to do proper due diligence. It makes sense to be working with a qualified real estate attorney or professional buyer's agent when scouting out foreclosures. Mistakes are easily made but with a pro, in your corner, the chances will be minimized.

Other Realty Times Articles Worth a Look

Use these valuable real estate resources to make excellent decisions when buying a home.

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Bill Gassett

One of the top RE/MAX agents in New England over the last decade plus. Providing exceptional real estate services to buyers and sellers in the Metrowest Massachusetts area including the following communities: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton and Uxbridge MA.

See my real estate website at Maximum Real Estate Exposure - one of the most visited real estate sites in Massachusetts.

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