Stages of Foreclosure

Stage 1: Pre-foreclosure

When homeowners default on their mortgage, their property is considered to be in a state of pre-foreclosure. Lenders are typically quick to respond to that first late payment, beginning with phone calls to the borrower.

How the foreclosure process actually proceeds from this point forward varies greatly from state to state. Tennessee is a title-theory state, in which lending institutions hold title to the property, while borrowers receive a deed of trust. Until the loan is paid in full, the title remains in the lender's name. Title theory tends to benefit lenders because it usually doesn't require a judicial action to move towards foreclosure.

During pre-foreclosure, homeowners are very likely to feel embarrassed and threatened by the phone calls and letters they begin to receive from their lender. It is generally true, however, that lenders are more interested in devising workable solutions than continuing the foreclosure process. Troubled homeowners should be encouraged to respond to their lender - if they don't, the problem will only get worse!

Stage 2: Sale/Auction

following a notice of sale, a lender typically lists the foreclosure property for sale at auction. The timing and procedures of these sales vary by state and, to some extent, sales terms will be determined by the lender. some lenders may even opt for a short sale, which means the property is sold for less than the amount of money owed, simply to remove a non-productive asset from the books.

In many cases, once the notice of default has been issued, the distressed homeowner has run out of options. In some instances, however, the bank will still want to work something out.

Frequently, the best bargains in distressed properties can be bought on the courthouse steps, although numerous pitfalls can be encountered. First, it's fair to say that you will not have complete information about what you are purchasing. Because defaulting homeowners frequently still occupy the home at this point, are are not likely to open their doors to show anyone around, you won't be able to see beyond the exterior. There are no requirements to disclose flaws. Properties are sold "as is" without any warranties.

It is also difficult to determine if there are any old debts that could surface later as liens on the title. For example, you may become obligated to settle with the contractor who put a new roof on the home, but was never paid. And if the homeowners are still in the home, you'll have to contend with the awkward business of evicting them, facing the additional risk that they will damage the property before they vacate.

Another challenge can be paying for the home. Usually, public sales require cash payments or at least hefty down payments that are usually non-refundable. This means that your financing will need to be securely in place well in advance of the auction.

Stage 3: Real-Estate Owned (REO)

If a foreclosure home does not successfully sell at auction, it moves into the lender's inventory and is considered a real-estate owned (REO) property. Generally speaking, lenders don't like to hold non-performing assets, especially ones that require upkeep and maintenance, so they may be motivated to sell. At the same time, lenders still want to maximize their profits and are unlikely to accept deep discounts.

Buying foreclosure property at the REO stage is typically the easiest and most straightforward approach, especially for investor-buyers new to foreclosures. many of the risks that are present at the auction stage have now been eliminated. however, the potential  return on investment has also been reduced. On the other hand, expenses such as taxes and liens, that aren't generally covered in an auction sale, may be covered by the lending institution in an REO sale.

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Hendersonville, TN 37075

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© Sydney McDuffie 2008