Unfortunately people are having financial troubles and some are falling behind on their mortgage payments. After a certain amount of months of non-payment a foreclosure of the property will occur.
Before either foreclosure proceedings happen the borrower will receive a “notice of default” stating that they are behind on payments and gives instructions on how to reinstate the loan. If that does not happen then a foreclosure will eventually result, but the foreclosure process depends on what state the real estate is in. There are 2 types of foreclosure proceedings:
- Judicial Foreclosure.
- Non-Judicial Foreclosure
With Judicial Foreclosure a lender files a “lis pendens” which is basically a notice of pending legal action that will affect the property. After this happens and the borrower still doesn’t satisfy the back mortgage payments, it is ordered to be sent to sale to satisfy the debt. This sale is usually handled by the county’s sheriff office where the property is located in. The sale has an auction style format and is called a “sheriff’s sale”
With Non-Judicial Foreclosure the real estate deed has a “power of sale clause”. This basically allows the lender to sell the property to satisfy the debt after the borrower defaults and does not reinstate the loan without having to obtain a legal decree of foreclosure from the court. There is however state statutes a lender must follow to allow opportunities for the borrower to reinstate the loan. If not reinstated, an auction sale occurs called a “trustee’s sale”.
Now if the property goes to auction and no bidder satisfies the debt the lender will retain ownership of the property and now the property is referred to as a “REO”. This stands for “real estate owned” and is the lender inventoried property resulting from a foreclosure and no 3rd party buyers at the auction willing to bid against the lender.
We will talk more about duplex reos, from foreclosure prevention to duplex reo investing in future posts.