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The Stages of Foreclosure

Updated on May 4, 2018

Stages of Foreclosure

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Introduction

The three stages of foreclosure are 1) preforeclosure, 2) foreclosure auction, 3) Real Estate Owned. This article will explore those stages and they're impact on the various players involved in the transaction.

Each has advantages and disadvantages with respect to purchasing foreclosures.

Stage 1 - Preforeclosure

A preforeclosure is the first stage where the bank notifies the homeowner that it is planning on putting up the homeowner's property for sale at a state auction. This stage is the only stage in which the homeowner can actually stop the foreclosure process by either declaring bankruptcy (in which case the courts will likely set up a schedule of payments for three or more years) or by actually selling the house before the auction date.

Although the homeowner could try to sell the clock is ticking and it can be difficult to sell a house (especially in this current crisis). The homeowner would be wise to put the house up for less than the fair market value so that the sale can be quick.

Another snag working against the homeowner is that any fees that are being incurred due to the foreclosure process (such as lawyers fees, etc.) must be paid above and beyond all the back payments that the homeowner default on. So the price of the house has to consider these fees as well as the value of the home. This can be a make or break situation for the homeowner as the price may be less than hoped for.

Stage 2 - Foreclosure Auction

If the homeowner is unlucky enough not to do something before the foreclosure auction then the property will be put up for sale, usually by the sheriff and often at the courthouse in the county of the residence being foreclosed upon. One important point to consider is that the bank is not allowed to set the starting bid for more than what the homeowner owes plus the fees incurred. If there is a successful bidder, any liens that exist must be made whole, i.e., paid by the bidder. If after all the liens and fees are satisfied, then the homeowner could get some money, but does not happen all that often. The homeowner typically gets nothing.

Stage 3 - Real Estate Owned

This is a fancy term for the situation that the bank will be faced with if there are no bidders at the auction. The bank now takes ownership of the deed and will try to unload this quickly to get it off the bank's books. Therefore, often the bank will accept extremely discounted offers from investors interested in the property. This stage is the worst case scenario for the bank so they are very, very motivated to make a deal with interested investors. You should keep that in mind if you are looking to invest in foreclosures.

How to Find Houses In The Various Stages of Foreclosure

One way to find foreclosure information is to establish a business relationship with a real estate agent (preferably one that specializes in foreclosures) or with a real estate lawyer (again one that specializes in foreclosures). You can approach them with the pitch that you plan on investing on many properties and will use them (assuming you find a good one).

As for the second stage, the foreclosure auction, the bank (or the lawyer hired by the bank) is required by law to make a public announcement (usually in the local paper) about the details of the foreclosed properties.

With the third stage, you'll want to establish a relationship with the bank's foreclosure department (or the manager that handles the bank's foreclosure).

The three ways above are certainly viable ways to get the foreclosure information that you need to invest in foreclosure properties but it quite time consuming and you are at the mercy of the professionals that you establish the relationships with.

There is a much easier way to get information on houses in foreclosure as well as the stage that they are in. You could use a listing service where you enter in criteria (such as the area you are interested in) as well as the stage of foreclosure the house is in. This will easily save you a boat load of time.

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