Real Estate Foreclosures

Real Estate Foreclosures – What and Why…

Foreclosure, in simplistic terms, is the process that the lender initiates when the borrower of a loan, against a property, falls behind in making the monthly payments to the lender.

When a lender lends money to a home buyer, the lender makes the most money on the interest payments that the borrower makes per the loan agreement.

From the lenders perspective, if the borrower pays the loan per the loan agreement, then it’s a great investment. Consider the following example: -

As you can see, even though the loan amount is $179,000, the interest payment total over $228,304! Even though the interest rate is very favorable at 6.5%, the lender is making a staggering 127.5% return on investment over the life of the loan.

Sometimes, though, the borrower will be late in making payments or may even completely stop making the payments.

Lender Protection

The lender therefore has to have some form of protection. They get this protection by placing a lien, otherwise known as a “note” or a “mortgage” on the property.

Each state follows a particular process for foreclosing on properties. It will either be deed of trust also known as non-judicial or mortgage also known as judicial. Some states use a combination of both – see the table at the end of this article.

Non-judicial foreclosures takes place outside of courtroom. A third-party trustee, appointed as part of the deed of trust, handles the foreclosure proceedings. Non-judicial foreclosures take several months to complete.

Judicial foreclosures take place in a court room. Once the mortgagee (borrower) falls behind in payments, the lender will file a law suit typically a “lis pendens”.

The lender’s attorneys and borrowers appear in court and typically the judge will rule in favor of the lender and a judgment is issued. A sale date is also set. Judicial foreclosures can take up to a year to complete.

Lender Owned Property

Either way, the idea here is, is that if the borrower does stop paying then the lender can legally remove the borrower from the property and subsequently sell the property and hopefully recoup the money they lent to the borrower. The property acts as collateral for the loan the lender is making.

If the lender does take the property back and sells it, they may get more money then they lent in which case the lender profits. If however, they do not then the lender makes a loss.

Lenders do not like losses but will take them because they are not in the business of owning properties. They are in the business of lending money and making more money in return.

Causes Of Foreclosures

So why do borrowers fall behind in their payments?There can be several reasons: -

• Many homeowners have purchased homes far beyond their means and cannot keep up with their mortgage payments.
• Adjustable Rate Mortgage, and similar loan programs. Resets, where the interest rate is raised from initial low rate, sometimes causes severe hardship to the borrower. A 2% increase in the interest rate could mean the monthly payment increase of several hundred dollars.
• Job loss. Loss of income will obviously negatively affect the borrower’s ability to make the monthly payments.
• Divorce. A lot of families, young couples especially, depend on more than one income to make ends meet. With divorce statistics being as high as they are, a divorce is essentially like a job loss.
• Medical. People face unforeseen medical emergencies and situations all the time. Not only medical expenses are out of control, but it could also lead to loss of income.

Although homeowners want to avoid foreclosure, it sometimes becomes very difficult to keep on top of the payments. Also, people in a foreclosure situation, refuse to recognize the signs and leave it too late.

As a real estate investor, if you can spot foreclosure situations, you will not only be helping the borrower, but also the lender.

Foreclosure investing is a great way to profit in real estate because this is where you will potentially find the best deals.