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How Do Foreclosures Work

How Do Foreclosures Work

Foreclosures are the legal process in which a property owner's right to redeem or retain the property is removed. It's pertinent to define what a foreclosure is before moving forward. 

Foreclosure can be defined as the legal process by which a lender attempts to reclaim the amount owed on a defaulted loan by selling the mortgaged property. Usually, default occurs when a borrower misses a number of payments. But it may happen when the borrower fails to meet other terms in the mortgage document.

The foreclosure process forms its legal basis from a mortgage or deed of trust contract, which allows the lender the right to use a property as collateral if the borrower fails to confirm the terms of the mortgage agreement.

Even though the process varies by state, the foreclosure process is established when a borrower defaults or misses at least one mortgage payment. The lender will then send a missed payment notice that demonstrates they haven't received the payment.

If the borrower misses two payments, the lender sends a demand letter. While this is more serious than a missed payment notice, the lender may still be willing to make arrangements for the borrower to catch up on the missed payments.

The lender sends a notice of default after 90 days of missed payments. The loan is handed over to the lender's foreclosure department. The borrower typically has another 90 days to settle the charges and reinstate the loan (this is called the reinstatement period).

At the end of the reinstatement period, the lender will begin to foreclose if the homeowner has not made up the missed payments.

The Foreclosure Process Varies by State

Each state has laws that govern the foreclosure process, including the notices a lender must post publicly, the homeowner's options for bringing the loan current and avoiding foreclosure, and the timeline and process for selling the property.

As in the actual act of a lender seizing a property, a foreclosure is typically the final step after a lengthy pre-foreclosure process. Before foreclosure, the lender may offer several alternatives to avoid foreclosure, many of which can mediate a foreclosure's negative consequences for both the buyer and the seller.

In 22 states—including Florida, Illinois, and New York—judicial foreclosure is the norm. This is where the lender must go through the courts to get permission to foreclose by proving the borrower is delinquent. If the foreclosure is approved, the local sheriff auctions the property to the highest bidder to recoup what the bank is owed. The bank becomes the owner and sells the property through the traditional route to recoup its losses.

The other 28 states—including Arizona, California, Georgia, and Texas—primarily use non-judicial foreclosure, also called the power of sale. This type of foreclosure tends to be faster than judicial foreclosure, and it does not go through the courts unless the homeowner sues the lender.

Let us look at a tax lien investing scenario when foreclosing is an option.

Remember, the redemption period starts on the day of the sale during the year the certificate was issued. If the property owner has not redeemed by the end of the redemption period, the tax lien holder can initiate the foreclosure process.

Second, the investor sends out notices to everyone with a financial interest in the property. This includes a mortgage company or another lienholder, like a mechanic's lien holder. It is possible to have the county help you do this for a small fee, hire a real estate attorney, or do it yourself if you know what you are doing.

Utilizing the foreclosure process is only necessary with tax liens since the county has already foreclosed tax deeds. With redemption deeds, the deed does not get filed until the redemption period expires. The lienholder is required to send out notices at the beginning of the foreclosure process. This gives the property owner one more chance to pay off the lien.

For example: it has been two years since you purchased a tax lien certificate and the redemption period is two years. Legally, the certificate holder can now foreclose on the property. Notices are sent out to the property owner and other interested parties, which have 30 – 90 days to respond.

If you are foreclosing yourself, the county can provide steps to complete the process. For example, they will require you to use certified mail for the letters, and the time period in which financially interested parties have to respond may differ. If there is a mortgage on the property, the mortgage company will likely respond to the notice with payment of your investment plus earned interest. If the mortgage company does not respond, the property reverts to the lienholder, free and clear of mortgage obligation.

Once you finish the foreclosure process and become the property owner, the property does not have any mortgages or liens against the property since they were cleared during the foreclosure process. When you send out notices, and no one responds, you show a judge your certified mail delivered and show they did not respond during the allowed time period, and the judge will issue a clear title.

Types of Foreclosures 

If a homeowner has defaulted on his payment, then the mortgaging bank will start the pre-foreclosure process. A tax lien will then be issued for the property so that the right to retain the property can be gained. You can do real estate investing in tax liens for a certain property that has been issued a lien and put out for an auction sale. You can earn profit from this because the state will pay fixed interest on a tax lien, and others will start the bidding price at auctions in the amount of the lien. Suppose the tax lien is unpaid during the duration of the redemption period. In that case, all other mortgages and liabilities on the house are extinguished, and the title to the property will be cleared. The investor will now own his or her new property with a clean title. However, if the owner can pay the property's liability, the investor can still earn through interest earned on the lien. Real estate investing in this manner can lead to profits in both ways.

Determining Real Property Values

People tend to overvalue or exaggerate the value of things they own. It is important to keep your emotions in check and value potential investments objectively. This session will discuss how to do that.

A proper value assessment ensures investment security. The number one thing to research is the property value. Different investment strategies require varying degrees of research. The more money invested, the greater the research that needs to be done. Tax lien investing typically requires an external evaluation, but tax deed or redemption deed investors need to know more specific information.

A few formulas used to determine property value are:

  • Comparable Market Formula
  • Net Operating Income Formula
  • Replacement Cost Formula

The only one you will likely use is the Comparable Market Formula.

To use the comparable market formula, the investor will price similar homes that have recently sold, and homes for sale within proximity to the home being valued. These similar homes are “comps” and should have the same features and characteristics as the current property being valued.

Appraised Value: A licensed professional real estate appraiser will determine the appraised value of a property. The appraiser will consider similar properties that have recently sold in the area. They might use properties that are currently for sale and properties that were for sale but have expired.

Wholesale Value: Wholesale value is usually on investors' properties and tends to be the lowest estimated price. Wholesale pricing usually means the property will sell for below market value. This is done for quick profit. These properties typically include foreclosure tax lien and tax deed properties.

Tax Assessed Value: Assessed value will be the value placed on a county tax assessor's property. This is an excellent way to check property value when working with tax liens and deeds. Though, this should not be your only way to determine what the property would be. Tax assessed values can fluctuate above or below market value. Generally, they run about 20 percent below the current market value.

Insured Value: Insured value is what insurance companies place on property improvements and structures. This is usually the amount it costs to replace or rebuild the system.

Mortgage Value: Mortgage value is what a mortgage company loans on a property. This value is generally close to the appraised value.

Retail Value: Retail value is what a homeowner or property owner places on the property. This is the price they feel their property is worth. This value is usually above market value and is the highest value place on real estate.

Real Value: Price someone is willing to pay for the property.


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United Tax Liens is a group of experienced, active investors providing everyday people with access to one of the best Real Estate Investment vehicles available today.

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