The Foreclosure Process

In California, virtually all residential mortgages are made using a Trust Deed which allows foreclosure using a stream-lined process called a Trustee Sale. While the Judicial Foreclosure process requires a court action and can take over a year to complete, the Trustee Sale allows a property to be foreclosed in as little as 3 months and 20 days. Up until 5 days before the Trustee Sale, the owner has a legal Right of Redemption during which time they can bring the loan current and cancel the foreclosure. Most banks are usually willing to work with borrowers to avoid the time and expense of the foreclosing. In cases where the owner does not have equity in the property, the bank may agree to a Short Sale where they to agree to forgive part of the debt upon the sale of the property.

Steps to Foreclosure

Notice of Default

A bank will generally start the foreclosure process after the borrower has missed two payments by recording a Notice of Default with the County Recorder. While this filing is public information and may be obtained from a title company or using an information service such as RealtyTrac most homes are not sold through unsolicited offers during the default period.

Short Sales

When a home goes into foreclosure there is little or no equity remaining in the property, a borrower may apply for a Short Sale where the bank forgives a part of the loan in order to sell the property. Short Sales generally go through an experienced realtor who must be approved by the bank and are listed for sale in the local Multiple Listing Service (MLS) with a notation that all offers are subject to bank approval. Because the property has not been foreclosed upon, the sale is otherwise considered a normal real estate transaction subject to state and federal mandated disclosures.

Because most properties which are Short Sales must be sold or go into foreclosure, the bank and the owner are motivated to price the property to sell quickly. In a real estate market where homes are selling relatively slowly, an area with many Short Sales can drive down prices by flooding the market with homes that have to be sold. But remember, that while Short Sale owners are motivated to sell, the property is being marketed by an experienced real estate agent who is marketing the property to get the best price possible.

Trustee Sale

If a mortgage has not been paid current within three months after a Notice of Default was recorded, a Notice of Trustees Sale is recorded and published in the local news papers with an auction date that is at least 21 days away. The owner may still bring the loan current for up to 5 days before the Trustee Sale which will terminate the foreclosure process and trustee sale. The Trustee Sale is generally held on the steps of the County Courthouse or the County Recorders Office and the starting bid is usually the amount owed on the mortgage plus processing fees.

Although you might be able to get a deal at a foreclosure auction, you need to aware that there are no inspections or disclosures, there may be other liens or title issues, and you will need to pay with a cashiers check if you are the winning bidder. Most homes at a foreclosure auction go back the bank because the minimum bid is not met (homes with equity usually don't get foreclosed) and if you do bid on a property, you will most likely be competing against professions for any real deals.

If you are interested in more information on the Trustees sale, you might want to read the excellent Los Angeles Times article by Annette Haddad Foreclosure: an auction adventure which was published on April 30th, 2007.

Bank Owned Property (also called Real Estate Owned (REO) or Corporate Owned)

If no one makes the minimum bid at the Trustee Sale, the property goes back to the bank who may sell it however they want. Most banks will use experienced real estate agents to sell bank owned properties who will list them in the local Multiple Listing Service (MLS) and market them property to get the best price possible. Like Short Sales, many bank owned properties in an area can drive down prices by flooding the market with homes that have to be sold. Unlike Short Sales, bank owned property is not subject to most state and federal disclosure laws.

How to Get A Deal Buying Foreclosures

Because most Short Sales or Bank Owned property will be market through the local Multiple Listing Service, you will want to work with a real estate agent experienced in the area you are looking to purchase a home. Although most foreclosure properties are priced at toward the bottom of market price for a quick sale, homes not in foreclosure may have equally motivated owners such as those who have a job transfer or are going through a divorce that may be a better value or a better match for you.