Buying Real Estate Foreclosures 3/E (PERSONAL FINANCE & INVESTMENT) - Softcover

Kollen-Rice, Melissa

Softcover

ISBN 10: 0071546618 ISBN 13: 9780071546614

Publisher: McGraw-Hill Education, 2008

Synopsis

The latest, most up-to-date information on one of the hottest real estate investment opportunities

Savvy real estate investors are ready to take advantage of rising foreclosure rates, but need expert guidance to navigate this profitable market sector. This fresh update of Buying Real Estate Foreclosures gives you all the information needed to find and finance bargain properties from banks, savings and loan companies, public auctions, government agencies, or any other source. Full of handy resources-worksheets, checklists, sample documents, and more-this is a reliable, profitable guide for experienced and first-time investors alike.

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Buying Real Estate Foreclosures

By Melissa Kollen-Rice

The McGraw-Hill Companies, Inc.

Copyright © 2009 Melissa Kollen-Rice
All right reserved.
ISBN: 978-0-07-154661-4

Contents

Chapter One

Understanding Foreclosures

Each state in the United States has its own legal procedures for taking foreclosure action. We can, however, find common ground in the basic principles that trigger the commencement of foreclosure actions and in the guidelines that help to control the actions in each state through to their conclusions. In Chapter 1, we introduce the legal procedure that occurs when a lender forecloses, including the definition of a foreclosure action, the types of instruments used to secure loans, the process and duration of judicial and nonjudicial proceedings, and the time frames for foreclosure of defaulting loans in each state. Knowledge of these important issues helps potential buyers (1) identify optimum purchasing opportunities that arise at specific intervals throughout the procedure, (2) recognize certain statutory regulations that may affect purchasing decisions, and (3) begin their new foreclosure venture with a strong foundation to build upon. In upcoming chapters, we bolster this foundation with proven techniques for buying foreclosures safely and sanely.

An Overview of the Legal Procedure in Foreclosure Actions

A foreclosure action is the legal procedure that a lender initiates to reclaim ownership and possession of a property after the borrower fails to repay the loan in accordance with the contractual terms. The foreclosure procedure terminates those rights that the borrower had secured, either through a mortgage or through a deed of trust.

Initially, when a borrower is late with a loan payment, the lender usually attempts to communicate with the borrower (i.e., via a telephone call or letter) to advise the borrower that the loan payment is overdue and to request an explanation for the nonpayment and an opportunity to work out a repayment plan with the borrower. Is the delay temporary? Is the situation that caused the late payment unusual and unlikely to recur? Will the defaulting borrower be able to resume making payments very shortly?

In some states, the mortgage and/or note or the deed of trust also requires the lender to issue a default notice advising the borrower that if he or she does not pay the arrears by a certain date, the entire loan balance will be "accelerated." If the lender is not required to send a default notice or to accelerate the loan, the lender may allow the defaulting borrower to reinstate the loan by paying only the late monthly payments. Once the lender accelerates the loan, however, rather than the borrowers owing just the unpaid monthly installments (plus any late charges that have accrued), the entire remaining loan balance becomes due and payable.

As an example (illustrated in Figure 1-1), suppose a borrower obtains a loan with terms that stipulate that the loan will be in default if the borrower is 90 days late in making the monthly loan payment.

In our example, the unpaid loan balance at the time of the default is 90,000 and the borrower's monthly loan payment is 1,000. After missing one monthly payment, the borrower is 30 days late and owes the lender 1,000 (plus late charges). After missing the second consecutive monthly payment, the borrower is 60 days late and owes the lender 2,000 (plus late charges). After missing the third consecutive monthly payment, the borrower is 90 days late. At this point, instead of the borrower's owing the lender 3,000 (plus late charges), the due date of the loan accelerates, in accordance with the 90-day default provision, meaning that the lender may call the entire remaining loan balance of 90,000 due and payable in full. If the borrower in our example is unable to pay the lender the entire loan balance and cannot work out an alternative repayment plan with the lender, the lender may opt to sell the property to the public at an auction in order to recapture its losses. The auction will be held at a designated location that is open to the public, such as the local county courthouse, town hall, or some other such place. The public is notified according to local custom, usually through advertisements published in the town, village, or city newspapers. A court-appointed referee, a sheriff or a trustee is appointed to accept verbal bids on behalf of the foreclosing lender from those who attend the auction and will award the contract of sale to the highest bidder. The initiation of the foreclosure action is guided by the instrument that created the borrower's obligation to repay the loan. All states use either a mortgage or a deed of trust.

Mortgages and Deeds of Trust

Mortgages and deeds of trust are the legal security devices that are executed by the lender and the borrower when the borrower obtains financing from the lender to purchase or refinance real estate. On a nationwide scale, the states are about equally divided in their statutory adoption of mortgages and deeds of trust, and a few states even use both.

Figure 1-2 is an illustration of a deed of trust, Figure 1-3 is an illustration of a note and mortgage, and Figure 1-4 is a chart illustrating the differences between a mortgage and a deed of trust.

Understanding Mortgages

In those states in which a mortgage has been adopted as a security instrument (lien theory states), the borrower owns and retains title to real property and the lender holds a mortgage that creates a lien against the borrower's real property. When real property is mortgaged, the borrower signs two separate legal documents, the promissory note (note or bond) and the mortgage. The note is evidence of the borrower's promise to pay the debt and sets forth the monthly loan repayment terms, including the payment amount, the due date, the grace period, the interest rate, default terms, and so on. The mortgage is a two-party instrument executed by the borrower (mortgagor) and the lender (mortgagee) that protects the lender by pledging the real estate that is the subject of the loan as security, or collateral, for the debt. If the borrower fails to make payments as agreed upon under the note, and the borrower is unwilling or unable to bring the payments current, lender has the right to protect its interests by initiating a foreclosure lawsuit to force the sale of the property in order to satisfy the outstanding loan balance.

Understanding Deeds of Trust (Trust Deeds)

In states where deeds of trust (also called trust deeds) are adopted as a security instrument (title theory states), these deeds of trust are used in place of mortgages. Deeds of trust are similar to mortgages in that they pledge real property as security for the loan that was taken out by the borrower to purchase the property. However, whereas a mortgage is a two-party instrument between the borrower and the lender, the deed of trust is a three-party instrument between a trustor, a beneficiary, and a trustee. The borrower is called the trustor, and the lender is the beneficiary. The third party, called the trustee, is usually an intermediary with no interest in the property, such as a title or escrow company. The trustee's job is to hold the title to the property in trust for the benefit of, and on behalf of, the beneficiary, as security for the payment of the debt, until such time as the promissory note has been satisfied and the loan paid in full. The trustee reconveys the property to the borrower after the deed of trust is paid in full.

If the loan payment is not brought current, the beneficiary may demand that the trustee initiate foreclosure proceedings to assist the beneficiary in recapturing its losses through money paid by the high bidder at a public auction or through a conveyance of title to the beneficiary if the property is not sold at the auction.

Judicial and Nonjudicial Foreclosures

While mortgages and deeds of trust are the security devices that establish the borrowers' obligations to repay their loans, if a borrower defaults on these obligations, there are two types of legal actions that may be commenced by the lender to cause the property to be sold at a public sale and, hopefully, to bring enough proceeds to pay the unpaid loan balance in full. Such actions, set forth by each state's foreclosure statute, are known as judicial or nonjudicial foreclosures.

A state's adoption of a judicial or a nonjudicial foreclosure statute affects two important issues: (1) the duration of the foreclosure proceeding and (2) the legal process that must be followed from commencement to completion of that proceeding. The differences can be significant. For example, the amount of time it takes a lender to foreclose on a delinquent loan in a state that has adopted the judicial approach to foreclosures is much longer than the amount of time it takes a lender to foreclose in a state that has adopted a nonjudicial approach. A judicial foreclosure is more cumbersome and takes longer to complete because it requires the foreclosing lender to initiate a lawsuit through the court system to obtain a judgment of foreclosure and sale. By contrast, a nonjudicial foreclosure, through its power of sale clause, can be completed in a fraction of the time it takes for a judicial foreclosure because, if a borrower defaults on repaying a loan, no lengthy court action is required by the lender—the property is advertised and sold quickly in accordance with the procedure prescribed by each state's foreclosure statute.

Some states have adopted a judical statute for all foreclosure proceedings; others have adopted a nonjudicial statute. Still other states have adopted a combination of the two statutes and allow judicial foreclosure proceedings for residential properties and nonjudicial proceedings for commercial properties. The length of time it takes for a lender to foreclose can have a dramatic impact on a buyer's foreclosure purchasing strategy. For example, in a nonjudicial foreclosure state, a buyer who wishes to purchase a preforeclosure before the auction would implement a more expeditious plan of action because of the abbreviated time frame available to complete the transaction. On the other hand, a buyer who wishes to purchase a preforeclosure in a judicial foreclosure state generally has more time, and therefore can implement a more leisurely plan of action.

In the next paragraphs, we look at the procedural differences in judicial and nonjudicial foreclosures.

The Judicial Foreclosure Procedure

In states in which a judicial foreclosure procedure is utilized, if the borrower is unable (or unwilling) to bring the loan payments current, the lender forwards the file to its attorney and authorizes the attorney to initiate a lawsuit to enforce the lender's rights pursuant to the mortgage or the deed of trust. The judicial process (derived from the word judge) is held in a courtroom venue and presided over by a court judge. The foreclosing lender's attorney orders a foreclosure search, which is similar to a report from a title company; it provides the attorney with information about the property owner and the mortgage or deed of trust instrument pledged as the security interest. In addition, the lender ascertains that the party named as the defendant in the foreclosure proceeding is, in fact, the current legal property owner of record. Other creditors with an interest in the property are located and named as defendants in the action, including the trustee holding the deed of trust, second mortgagees, mechanic's lien holders, judgment holders, utility companies, and federal and state income tax and property tax lien holders.

Next, the attorney prepares the legal documents for the lawsuit, including a summons (the notice directing the defendant to appear in court), a complaint (the plaintiff's allegations of entitlement to relief and the relief sought), and a lis pendens (also known as a notice of pendancy), which is the legal document that "gives notice to the world that there is a legal action pending on this property which may affect the title."

The required documents are filed with the clerk of the court in the county in which the property is located, and an index number is purchased to bring the action to the court's calendar. The index number will be used to identify the action and will appear on all future notices, advertisements, and legal filings relating to this case. In many jurisdictions, anyone who wishes to view the legal file, which contains the paperwork associated with this action, would requisition the file by the index number. Once the lis pendens is filed, the public is on notice that there is an action pending on this property. Any future liens or judgments filed against the property after the lis pendens was filed may be excluded from the foreclosure action, and those creditors will have to initiate legal proceedings against the delinquent owner's assets independently.

After the lender's attorney files the necessary documents with the court, all parties named as defendants in the action (including the delinquent borrower, the creditors, tenants of the owner, trustees, and anyone else involved) must be served with the legal documents so that their interests may be terminated by the foreclosure action. Each state has enacted statutes that regulate the time frames within which legal documents must be served on the defendants and proof of service filed with the courts. Some states also require tenants living in the premises (if any) to be named as parties to the action and served with notice in order to terminate an existing lease. If the tenants are not named, the new owner may be required to honor the terms of the preexisting lease.

If the borrower fails to respond to the complaint within the statutory time limit, the attorney submits a report to the court stating the facts of the case and requesting the court to appoint a referee or sheriff. The referee/sheriff reviews the facts and circumstances in the foreclosure action and renders his or her report to the court. The judge then issues a Judgment of Foreclosure and Sale in favor of the foreclosing lender.

The auction sale is advertised in accordance with local statutes. At the auction, the referee/sheriff reads the Terms of Sale to the public and starts the bidding at the "upset price," also known as the "opening bid amount" or the "the dollar bid," which is the amount set forth by the courts in the Judgment of Foreclosure and Sale plus any amounts required to be included by the state's foreclosure statute that have accrued between the Judgment of Foreclosure date and the auction date (for example, interest and unpaid property taxes, foreclosure costs, legal fees, and so on).

The step-by-step procedures for a judicial foreclosure action are illustrated in Figure 1-5.

The Nonjudicial Foreclosure Procedure

In states where a nonjudicial foreclosure procedure is used to foreclose a mortgage or a deed of trust, instead of commencing a lawsuit to fore-close on the defaulting borrower, the foreclosing mortgage lender or deed of trust beneficiary invokes the power of sale clause pursuant to a covenant in the mortgage or deed of trust.

If the borrower does not repay the loan in accordance with the terms of the mortgage or deed of trust, the power of sale clause allows a lender holding a mortgage or a trustee holding a deed of trust to sell the property at a public auction without a court or judge's involvement. The nonjudicial procedure is less costly and time consuming than its judicial counterpart because it occurs under the supervision of a trustee and does not require a lawsuit. The lender or trustee simply records a notice of default and sends a copy to the borrower or to the trustor; after the statutory period, a notice of sale is posted on the property.

The step-by-step procedures for a nonjudicial foreclosure action are illustrated in Figure 1-6.

Finding the Foreclosure Statute in Your State

Each state has its own foreclosure statute governing such issues as its legal procedure, required legal notices, necessary versus permissible defendants, the defaulting borrowers' right of redemption, deficiency judgments, payment of surplus funds, filing requirements, and other such factors. The foreclosure laws for each state are only a click away on the Internet. Using a search engine such as yahoo.com, google.com, msn.com, or aol.com, simply type in the name of your state and the words "foreclosure statute" or "foreclosure laws."

A chart with a compilation of foreclosure details for each state, including the security interests (mortgage or deed of trust), foreclosure type (judicial or nonjudicial), foreclosure time frame (months for completing a foreclosure action), and foreclosure statutes adopted by each state, is given in Figure 1-7.

(Continues...)

Excerpted from Buying Real Estate Foreclosuresby Melissa Kollen-Rice Copyright © 2009 by Melissa Kollen-Rice. Excerpted by permission of The McGraw-Hill Companies, Inc.. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

Edition details

• Publisher: McGraw-Hill Education
• Publication date: 2008
• Language: English
• ISBN 10: 0071546618
• ISBN 13: 9780071546614
• Binding: Paperback
• Edition number: 3
• Number of pages: 272