Understanding the Foreclosure Process

How many people do you know who are in foreclosure? Do they understand what’s going to happen and what to do about it, or are they still in panic mode?

You could think of the foreclosure process as a conversation between a lender, a homeowner, and a real estate professional. The discussion is about what to do with the home, now that Plan A didn’t work out. All the participants can have their say, but too often it doesn’t happen that way. The lender does all the talking, without feeling obligated to encourage the homeowner to negotiate.

A good short sale investor can help minimize the damage to a homeowner in trouble. With the right training and coaching, that investor can find these people, negotiate on their behalf, and really make a difference in their lives. If you’re a short sale investor, how do you know when you find a homeowner that needs you?

Here’s their situation:

1) A homeowner is making regular payments on a new or refinanced mortgage from a lender. Let’s say they have 10 percent equity in the property and two mortgages.

2) The homeowner loses their job or other source of income.

3) The homeowner begins either depleting the savings account, “borrowing” from other bill money, or borrowing from friends and family (or a combination of those) to make mortgage payments.

4) The homeowner’s emergency system becomes exhausted, causing them to miss the first mortgage payment.

5) Meanwhile, payoff amounts on both mortgages increase with every month that no payment is made.

6) Meanwhile, the real estate market is taking a nose dive and it is becoming more difficult to find a buyer at an asking price that can pay off both loans.

7) The homeowner misses a second mortgage payment, and then a third.

By this time, the primary lender has put the property on their “heading for foreclosure” list, and the homeowner has received a notice in the mail that raises their blood pressure. If they haven’t already, the homeowner now realizes that they need a Plan B. This is also when they’re more likely to respond to a letter or a sign that offers help.

Keep in mind that foreclosures are bad for both the lender and the homeowner. No lender wants to take a loss on their loans. Mortgage interest is a big part of their profit. Even the community suffers a little as property values decrease.

On the lender’s end, this is where state law comes into play. Different states have slightly different procedures and requirements for the foreclosure process, but this is basically how it works.

8) The primary lender begins the foreclosure process by filing a lawsuit to repossess the property.

9) The foreclosure notice is put on public record, and the homeowner is served with the paperwork (along with any other lenders or lienholders). At this stage, called pre-foreclosure, short sale negotiations can begin.

10) Meanwhile, if their financial situation has not improved, the homeowner misses more payments to the lender.

11) When the lender receives final approval from the court to foreclose on the property, a date is set for the auction.

12) The sheriff or trustee (depending on state law) conducts a drive-by appraisal of the exterior of the home, which generates an estimate of the home’s value.

13) The sheriff or trustee plans to open the auction bidding at two-thirds of their estimated property value (a common percentage in most states).

14) The property is auctioned off at a public foreclosure auction or sheriff’s sale to the highest bidder (but not for lower than the opening bid).

15) At the auction, the property is purchased either by an end buyer, a real estate investor, or (if all else fails) the foreclosing lender. Around 96 percent of the time, the lender is the one to purchase the property, turning it into an REO or a bank-owned property.

16) At the auction, all opportunities to complete a short sale are over, unless your state allows a redemption period after the auction. (This is an extension of time given to the homeowner to catch up on their payments or sell the property themselves.)

17) After the auction, if your state has a redemption period, this time period begins. Again, the homeowner gets one more chance to keep or sell the property.

18) If the redemption period ends with no satisfaction from the homeowner, the property is transferred back to the primary lender through a sheriff’s deed, and it then becomes a bank-owned property, or REO.

19) Either after the auction or after the end of the redemption period, the lender attempts to sell the property through a real estate agent to an end buyer or investor.

20) Upon final sale of the property, the primary lender records the partial recovery (often only 50 percent) of the unpaid loan.

21) All lenders or lienholders sue the homeowner for the unpaid portion of the loans (including collection costs and other fees), and the court awards each lender or lienholder a deficiency judgment against the homeowner, who then becomes responsible for all balances due.

Again, the laws may be different in your state, but this is a general overview of the legal procedure to repossess a piece of property.

If you’re not a short sale professional, get help from someone who is. Their experience with the negotiation process goes way deeper than just knowing what’s going to happen, and it can make all the difference in the outcome of the situation. Just remember that you have deadlines, and get help as soon as possible.

If you are a short sale professional, stay in touch with everyone throughout the process. Make good use of your coaching contacts in case you run into something tricky, and never forget that the outcome affects a homeowner’s financial future. (Don’t have any coaching contacts? Get one - just in case!)

The foreclosure process may be unavoidable for many homeowners, but remember the saying, “The best defense is a good offense”? If you know what’s going on, you’re more likely to be able to minimize the damage.