If you pursue a keen interest in real estate, the term ‘foreclosure’ will immediately ring a bell. For the ones who may not be very well-versed with this arena, foreclosure implies a legal procedure wherein the lender lays claim on an asset that was used as collateral against a loan, the repayment of which has been discontinued or defaulted.
Take a look at the following terms in order to understand the concept of foreclosures:
Equitable Right of Redemption – When a borrower draws a loan from the lender, the courts of equity grant an ‘equitable right of redemption’ to the borrower. As long as this right exists, the lender cannot be completely certain that he can lay a claim on the asset that was used as collateral against the loan. Hence, in the event of a foreclosure, the lender ‘closes’ this right of redemption to obtain a legal and equitable right on the asset.
Security Interest – This is an agreement between the lender and the borrower. It discusses the right of the lender over an asset depending on the performance of the borrower during repayment. If there is a payment default, the lender is entitled to seize or sell the asset to recover the debt.
Non-Recourse Loan – Also known as non-recourse debt, this is a type of loan secured by collateral, usually a real estate asset. The borrower is not liable to any amount beyond the value of the collateral. If there is a default in the repayment, the lender can only recover the amount that can be yielded through the sale of the collateral. At times, this amount may not cover the debt completely. In the event of such an occurrence, the lender may file for a ‘deficiency judgment’.
The process of foreclosures is legally complex but for the ones involved in real estate dealings, this is quite regular. Real estate mogul, Jeff Adams, has explained the entire procedure in a clear 5-stage walk through:
1. Notice of Default
The NOD is a notice issued by the lender if the borrower defaults 3 or more monthly payments. Usually, such missed payments are settled by the end of the mortgage term giving the borrower some time to recover.
2. Negotiation
Usually, lenders are open to figuring out a working solution with the borrowers. Some state laws make it mandatory to conduct a negotiation process for 30 days. If all such talks fail, the lender informs all the parties involved and issues a NOD.
3. Post NOD-filing Period
The borrower gets 90 days to either repay the defaulted amount or work out a solution with the lender. If nothing works out, the property will continue into foreclosure.
4. Trustee Sale
At this stage, the homeowner / borrower can work out with a trustee to check if a short sale is feasible. However, the lender has the right to sell the property right away or refuse negotiation.
5. Auction
This is the final stage wherein a foreclosed property is sold off by the lender to the highest bidder.
Jeff Adams believes that the current real estate scenarios make investment in foreclosed properties an excellent option. However, he recommends doing this through a reliable foreclosure agent.
