John M. Lee: Foreclosure Overview

As interest rates increase and the rate of appreciation decreases, we are starting to see more foreclosures. They are more prevalent outside the San Francisco Bay Area, but I am starting to see some occurring in the City.

Foreclosure is a process that allows a lender to recover the amount owed on a property in the event that the borrower defaults on a loan. Typically, the lender will try to work with the owner to come up with a repayment plan if at all possible because the banks do not want the properties back.

Usually if a borrower is 90-days late, the lender will start the foreclosure process by recording a Notice of Default on the property. This gives public notice that the borrower is delinquent and that, unless they make good on the loan payments, the lender will do what it can legally to recover what is owed, including principal, back interest, late charges and legal fees.

Once the foreclosure process is initialed, it can end in one of four ways: 1) The borrower can reinstate the loan by paying off the default amount during the grace period; 2) The borrower can sell the property to someone else and pay off the loan and the other charges; 3) The bank files for a Trustee Sale and, at auction, sells the property; 4) The bank completes the foreclosure and takes ownership of the property.

During each of these stages, there are opportunities to create a win-win situation for both buyers and sellers. Initially during the foreclosure period, a new buyer and the seller can come to an agreement that the buyer will pay the seller a certain amount of money and assume the balance of the loan. The buyer can then apply to the bank and get approved.

Both parties can benefit because the buyer gets the property and the seller avoided foreclosure.

If a trustee sale occurs, the buyer may purchase the home at an auction sale, which is usually held in a public place such as the front steps of City Hall. The bidding process occurs fairly quickly, but buyers must purchase the property for all cash on the spot. The disadvantage is that most of these properties are bought sight unseen, which means it could come with its own set of problems, such as massive deferred maintenance, tenant issues and/or owners refusing to vacate.

Because of these factors, the number of potential buyers is limited.

Once a foreclosure occurs, the bank becomes the owner of the property. The bank normally will evict the occupants, clear the title, do some minor cosmetic touch-up work, and market the property through a local agent and the Multiple Listing Service (MLS). Thus, it becomes a normal sale with the bank as the seller.

There are different opportunities for buyers of foreclosure properties along each step of the way. The most difficult parts are identifying and contacting the parties involved and negotiating the transaction because there are strong emotions involved when a homeowner is losing his or her home.

There are also pitfalls along the way and always unforeseen problems. But with persistence and some experience, foreclosures can be and have been a way to riches for some investors.

John M. Lee is a broker with Pacific Union. If you have any questions, call him at (415) 447-6231 or e-mail johnlee@isellsf.com.