Foreclosure

Knowing and Understanding Foreclosure Terms and Phases of Foreclosure

Interested in buying foreclosure??  Whether you are an investor or a buyer looking to owner occupy, knowing and understanding foreclosure terms and phases of foreclosure is important.  The most common foreclosure terms relating to the phases of foreclosure are  NOD,  ("Notice of Default"), NTS ("Notice of Trustee Sale") and REO ("Real Estate Owned").  All three are foreclosure related terms but they each stand for different phases of foreclosure.  It is very important for a buyer to know which phase of foreclosure a home is in and what the current foreclosure status is of that home. 

I have received several potential leads from buyers interested in buying a foreclosure in Essex, Passaic and Morris Counties.   They start asking about different properties, rambling off some addresses or even email me the link they found on the internet to the property.  Most of the times these properties are not listed for sale in my multiple listing service (Garden State Multiple Listing Service).  WHY NOT???  Because most of these properties are in the early phases of foreclosure.  

NOTICE OF DEFAULT PHASE

After a little research I find the property and its not listed for sale but instead the lender filed a public default notice, i.e., Notice of Default (NOD) or sometimes referred to as Lis Pendens (LIS).  The reason why the lender filed a Notice of Default or Lis Pendens is because the owner defaulted on their mortgage and has stopped making payments (usually about 90 days late).  This is the first step in the foreclosure process and basically is telling the owners that you either pay by a certain date or the lender will foreclose on the property.    The Notice of Default/Lis Pendens is a public record therefore it is published by many online websites that track these types of default.  It doesn't necessarily mean that the property is currently available for purchase or that the sellers even want to sell it.  It only means that the owner defaulted on their mortgage and the bank has filed the Notice of Default.  Not all homes that fall into foreclosure go to public sale because owners have the right to cure the default by reaching an agreement with their bank.

WHAT IS A SHORT SALE

Sometimes a homeowner in default can list their home as a short sale.   

What is a short sale?  Defined by the New Jersey Association of Realtors a short sale is.....

....a transaction for the sale and purchase of real property where the purchase price is less than the amount required to pay off the liens on the real property, such as mortgages, judgments, taxes, homeowner or condominium association fees, assessments, as well as closing costs including but not limited to brokerage commissions, realty transfer fee, and attorney's fees.


In short, today the house is worth less than the seller owes the lender.  The lender must agree a short sale and any sales contract for a price less than what is owed must be approved by the lender.   

NOTICE OF TRUSTEE SALE or NOTICE OF FORECLOSURE SALE

If the homeowner does not bring the loan current or if the property is not sold through a short sale, the lender will take the property away from the owner.  In New Jersey, in order for the lender to take the property away from the owner, the property will be listed by the County Sheriff as a Notice of Trustee Sale or a Notice of Foreclosure Sale.  If you buy a  property during a trustee sale or foreclosure sale, you will receive the property 100% “as is”.  That could include existing liens and even current occupants that need to be evicted. Going once... Going twice...  NOT Sold???

REO a/k/a REAL ESTATE OWNED

If the property is not sold at public auction, the lender takes ownership of the property and the property then becomes REO ("Real Estate Owned"), i.e., the bank now owns the property.  Sometimes during the pre-foreclosure phase the lender and the owner will reach an agreement and the lender will take ownership of the property (REO) without having a public auction.  Once the lender owns the property they will list the property for sale with a broker.  See Buying a Bank Owned Property below. 

Buying a Bank Owned Property 

There is a lot of interest in buying bank owned properties these days. A lot of information, some good and some bad, is all over the internet. Now that you know the difference and understand the different terms of foreclosure and foreclosure phases, this information is focused on buying a bank owned property a/k/a/ REO.

What’s an REO?

REO stands for “Real Estate Owned”.  These are properties that have gone through foreclosure and are now bank owned. This is NOT the same as a property up for foreclosure auction.    With a REO or bank owned property, the bank will see to the removal of tax liens, evict occupants if needed and generally prepare for the issuance of a title insurance policy to the buyer at closing.  Keep in mind that because the lender never occupied the property, the banks normally do not provide a Seller’s Disclosure, a document that normally requires sellers to tell you about any
defects they are aware of.

Is it a deal?

It’s commonly assumed that any REO or bank owned property must be a bargain and an opportunity for easy money. This isn’t always the case.  You have to be very careful about buying a REO especially if your intent is to make money off of it (i.e., fix it and flip it).  While the bank is typically eager to sell it quickly, they are also strongly motivated to get as much as they can for it.  Unfortunately many REO properties require total rehab and/or extensive repair.  Therefore, when considering the value of a REO, you need to look closely at recent comparable sales in the neighborhood and be sure to take into account the time and cost of any repairs or remodeling needed to prepare the house for resale.  If you are going to owner occupy the property, you still need to take into account the costs to renovate and its long term value once the renovations are completed.

Ready to make an offer?

Most REO listings are on the market with real estate agents and listed on the GSMLS (“Garden State Multiple Listing Service”). As with writing up an offer on any listing, we will attach documents proving your ability to afford the home (either a pre-approval letter or proof of cash funds).  It is also typical that since the bank was “burned” before by the previous owner, the bank may require you to be pre-approved by them as well.    As with any transaction, the bank may either accept your offer, offer a counteroffer or simply not accept.  The bank is usually looking for the highest offer with the best terms.  Sometimes the process involves not only myself as your agent, but the listing agent and multiple people at the bank who unfortunately don’t usually work evenings or weekends.  It’s not unusual for the process of offers and counter offers to take days or even weeks.

What now?

Since you now have a better understanding of buying a bank owned property ("REO"), and have reviewed Steps to Buying a Home, search foreclosure properties for sale and be sure to select "foreclosure" in the listing type dropdown menu. 

Resources for Homeowners Facing Foreclosure:

Government and Non-Profit Agencies Providing Assistance 

Short Sale vs. Foreclosure

Tenant's Rights

The Right to Rent Act of 2010 - Allowing homeowners to stay in their homes

Credit Score Impacts - Short Sale vs. Foreclosure 

The above is for reference only.  Every situation is different and you should speak with an experienced mortgage loan officer to discuss your options.