Foreclosures – Opportunity in Disguise? By Jeff Adams

The real estate world is not merely about seeking the right property and buying it for the purpose of using it as an owner or investor. There are numerous cases where a property owner, in the course of paying off the loan amount, defaults and stops making any further payments to the lender. One of the possible stages that such a situation may lead to is called a Foreclosure.


The Initiation and the Course of a Foreclosure

  • ‘Foreclosures’ refers to a legal process via which the lender attempts recovering the outstanding loan amount from the property owner. The process constitutes of a forced sale of the property, usually declared as collateral in the mortgage.
  • A foreclosure legally initiates when a lender files a public default notice; and as soon as this happens, the borrower is under ‘pre-foreclosure’.
  • A foreclosure can last ranging from a few months to about a year or even more. The end result is usually the same, if the borrower does not take any action to repay the outstanding liability.
  • Generally, a public auction is held at the end of a foreclosure and the property is sold to the top bidder. In the majority of cases, the money lender repossesses the asset in question.


What are the Types of Foreclosures?

  • Chiefly two types of foreclosures – Foreclosures by judicial sales and Foreclosures by power of sale – are most widely implemented.
  • Judicial – This type of foreclosure involves selling the mortgaged property under court supervision. The proceeds are used to first meet the mortgage amount; and next in line are other lien holders. Finally, the remaining proceeds, if any, go to the borrower.
  • Non-judicial – This type of foreclosure is also known as foreclosure by power of sale. Under this process, the mortgage holder can hold the property sale without court supervision. This is a faster method and economically more viable as compared to the former. However, exactly as in the foreclosure by judicial sale, the lender and any other lien holder are respectively the first and second beneficiaries from the sales proceeds.
  • This type of foreclosure, however, requires the mortgage or deed of trust to pre-include ‘power of sale’ as a clause.


The Less Known But Original Method of Foreclosure

There are other types of foreclosures as well, but are usually considered minor due to their limited use.

  • For instance, a strict foreclosure involves the mortgagee filing a lawsuit. If successful, it results in a court order, wherein the defaulter needs to pay the lender the outstanding amount within specific time duration.
  • The mortgagor’s failure to do so, however, titles the mortgage holder as the new property owner, without any obligation to sell the same.
  • A strict foreclosure is usually available if the debt amount exceeds the property value. Historically speaking, this was the original foreclosure process.

A foreclosure can turn out to be a positive option for a borrower in question. It gives a defaulter an opportunity to either clear off the debt and avoid years of marred credit history, or reduce their monthly payment amount and extend the loan duration either temporarily or permanently.