A frequent question/request I get is, “What about foreclosures?” Whether the person asking is an investor or someone buying a personal residence, the motivation behind this question is clear: to save money.
So, do you save money buying a foreclosure? The answer to this – and I’m sorry to answer you with a cliché – is: it depends. To understand why, you need to understand what a ‘foreclosure’ really is and what this means as a buyer. There are a lot of variables.
When it comes to this subject, the biggest confusion is what exactly a ‘foreclosure’ is. Most folks hear about foreclosures and think of them as one separate segment of the real estate market. But there are actually three (for our purposes) stages of foreclosure and they’re all quite different animals. What you think of when you say ‘foreclosure’ may mean something different than the person you’re talking to.
Stages of Foreclosure
In simple terms, there are three stages: pre-foreclosure, foreclosure (trustee’s sale), and post-foreclosure (bank-owned properties).
Pre-foreclosure is when a homeowner has fallen behind on payments. Banks will usually try to address the problem without legal action for 90 or so days, but finally the bank will file what is called a Notice of Default.
Foreclosure (Trustee’s Sale) – the sale, on a specific date (after the buyer has had the state-required time to bring the mortgage current and has not done so), where the bank auctions the house to the highest bidder. The bank makes the opening bid on its own house, in an amount that will satisfy the debt on the property. If you, as a buyer, have done your research and decide the ‘price is right’, you bid on the house. If someone (could be you!) outbids the bank, he or she gets the house, and the whole party is over. But if no one outbids the bank, then the bank follows through with the foreclosure, making the bank itself the new owner. And this brings us to the last phase…
Post-foreclosure is when a house is owned by a bank. It will subsequently be listed in the MLS (the system that allows you and agents to see what’s for sale in the area), just like all of the other houses for sale out there. The difference is that it is owned by a bank, not by Matilda Q. Bancroft, your friendly neighbor who is moving to Wichita.
These are broad brush strokes about the foreclosure process. In the next article, we’ll get into more detail when we talk about what your options are as a buyer in the three different periods – the approaches are very different. Each approach has, in effect, a different seller and different options and barriers.