Laws surrounding bank foreclosure vary from state to state; therefore, it’s important to check with an attorney if you’re facing bank foreclosure. If you are considering purchasing a bank foreclosed property, you should look for a reputable lending institution and a real estate agent who has your best interests in mind.
The bank may contact the borrower when the first or second payment is missed, to try and work with the borrower to avoid the foreclosure process. However, it is ultimately the borrower’s responsibility to contact the bank to see if a loan modification can be made.
Because the bank probably has a large number of outstanding mortgages, it cannot afford to simply remain idle while borrowers neglect their payments. In most cases, if a bank foreclosed property goes unsold for many months (or even years), the bank loses money on the maintenance and resale price when the house is finally sold.
Typically, the bank foreclosure process is a 3-step process whereby a bank takes action against a borrower who fails to make the required principal and interest payments on a mortgage loan. The main steps of the bank foreclosure process are as follows:
Bank Foreclosure Step 1 – Lis Pendens
The first step of the bank foreclosure process occurs when the bank appoints an attorney to file a public “Notice of Lis Pendens” (Latin for “suit pending”) or other lawsuit against the borrower for non-payment of the mortgage loan. This usually happens when the borrower has failed to make a payment for 6 months.
Although the “Lis Pendens” is an official notice of intention to foreclose, the borrower technically still has possession of the property and may attempt to sell it to avoid bank foreclosure. However, if the court grants a judgment in favor of the bank, the bank then has the right to evict the homeowner and take back the property.
Bank Foreclosure Step 2 – Title Search
The second step of the bank foreclosure process occurs when the bank pays a 3rd party to conduct a title search to determine whether there are any outstanding liens or judgments against the property (such as unpaid contractor’s bills from home improvements, IRS tax liens, or outstanding HOA dues). An attorney will work with the creditors to reach a settlement so the home will have a clear title when it is eventually resold.
Bank Foreclosure Step 3 – Auction
The final step in the bank foreclosure process is when the bank takes possession of the property and appoints an attorney as personal representative to put the property up for auction. At most past real estate auctions, banks would set the opening bid as the final amount due on the loan (including any related outstanding fees). However, due to the abundance of inventory currently available and the relatively small pool of buyers who can afford to pay cash at auctions, banks have begun to lower their starting bids to less than the amount owed to them by the borrower.
If the bank is able to sell the property for more than the amount outstanding, the overage is credited back to the borrower. However, if the property is not sold at auction, it goes back to the bank as an “REO property” (Real Estate Owned). The bank may then hire a real estate broker to disclose that it is bank-owned property on a list which becomes public information. This list is frequently accessed by real estate investors who know that banks will typically price the property at 10% to 15% below current market value (in hopes of unloading it quickly and reducing their liability).
By understanding the bank foreclosure process, real estate investors and homebuyers simply looking for a good deal are better equipped to search for potential values from the wide inventory of available bank foreclosed properties.