Archive for the ‘Foreclosures’ Category
Deficiency Judgment After Foreclosure? Is It Likely The Lender Will Sue You
Foreclosures are on the rise, and so are judgments from lenders to people that have gone through a foreclosure. While there are several reasons to try to avoid a foreclosure such as your credit, future buying power one of the main concerns is if the lender can sue you for a deficiency judgment. A lender, in most cases, has the right to sue a homeowner whom has lost their home to a foreclosure, however in most cases there is little danger for the former homeowner to be sued in the event of a foreclosure.
Understanding how the foreclosure process works will also help you understand how a deficiency is created. The liens that are affecting the property are paid off by way of a sheriff’s sale, or foreclosure action. The proceeds that are generated during the sale are used to pay off lien holders that have interest in the property. In many cases, the first mortgage holder ultimately purchases the property, and buys the house back. By making the minimum bid on behalf of them, the first mortgage holder and the most vested, wins the auction. However, when this happens they do not pay the loan off in full, this presents an issue of a remaining outstanding balance on the loan. If the proceeds do not cover the entire loan amount and therefore you have a difference between what is owed and the actual sales price this does not mean that you are responsible for the difference.
First, in order to responsible for the difference, the foreclosure laws in the state where the sale was a held have to allow the lenders to sue the previous homeowner for the deficiency. Not all state permit the lenders to do this, you will need to check your local laws for each particular case. If in the event that the state does not permit this action from the lender, then you are perfectly safe from being sued, you have nothing to worry about, the lender will not be able to take other assets such as cars, or wages from you, and they simply have to take the loss.
In the case where the law does permit the lender to sue, it is rare that they will take legal action to do this. Think about it, people that have lost their homes to foreclosure are usually in a financial position that enabled them to make the payments and lose their home in the fast place. Therefore, most lenders have the same thoughts; they are worried about how they would ever collect the money, even if there were a judgment against the previous homeowner. IN just about all case, they do not have the money to pay it back anyway so a judgment is worthless. Victims of foreclosure generally file a bankruptcy shortly after, because they are having financial difficulties and a bankruptcy is a way to help clean the slate. The fact of the mater is, lenders are not likely to pursue you personally, as in most cases it is simply a waste of time and money, and the will not recapture there loss anyway.
Therefore, in conclusion, you almost never have to worry about a lender suing you for a deficiency from a foreclosure, even if the law allows the lender too. Lenders can try to get the outstanding balance, but the additional costs to pursue it and the unlikely chance they will recoup the loss makes it highly unlikely that they will try to make you pay for the deficiency after a foreclosure. Most lenders will accept the loss, and leave the previous alone so that all parties involved can move forward.
Foreclosure Auction
The foreclosure auction is a public auction that allows any member of the public to bid on a house. Typically you need to register prior to the day of the auction and you need to have a cashiers’ check made payable to the clerk of the court for at least 5% of the purchase price.
If you bid on a house and win the auction you are expected to pay the balance of the amount either later that day or within 24 hours. In the event that you do not pay the balance in time then in most counties you forfeit your deposit.
You cannot get a mortgage to buy a property at the foreclosure auction. You need to have the ability to pay cash for a property and you need to be able to produce both the deposit amount and the full amount within no more than 24 hours after the auction. Since so much cash is required, investing in foreclosures by buying at the courthouse is difficult for new investors.
Investing at the courthouse is also full of risks. When you buy a house at the courthouse you do not get free and clear title. You get a property as is. If there are liens, judgments or code violations recorded against the property then these will not be wiped out by the foreclosure auction. If your property has squatters or unwanted tenants you will need to go through the eviction process prior to even entering your property. In most cases there is no inspection of properties sold at the courthouse so any damages that there might be are your responsibility. You also might purchase a property only to find out later that all the cabinets, appliances, and fixtures have been stolen out of the property.
In some cases beginners at the courthouse are not even aware that they are not bidding on a first mortgage. I have seen bidders bidding on a second mortgage only to find out that there is a first mortgage ahead of them. If you are going to be investing in foreclosures by buying them at the courthouse it is imperative that you understand “position” and which mortgage you are bidding on. It is also imperative to do a very thorough title, lien, utility and code violation search. It is also important to do your homework in understanding the condition of the property, the value of the property and the estimated repairs that the property will need.
Investing in foreclosures at the courthouse is not for the faint of heart and certainly not for beginners. You need to be very knowledgeable about real estate law, the foreclosure process, and have access to a good title agent that will run title searches for you. Since buying at the courthouse requires cash it has a high barrier to entry. Anyone without access to cash cannot buy at the courthouse. This effectively eliminates a lot of the competition. If you are willing to be diligent and do the work, buying at the courthouse can be very rewarding. However this is not an area for beginners. Anyone can watch a foreclosure auction by going to the courthouse on the day of an auction. You do not need to be a bidder to enter the room where the auction is being held.
Buying at the courthouse can be frustrating since foreclosure auctions are often cancelled at the last minute. Auctions can be cancelled because one or both of the parties was not served correctly, the seller has filed bankruptcy or the seller has negotiated a loan modification with the bank. Doing a lot of research on properties and then watching them get cancelled at the last minute can be very time consuming and frustrating.
Usually the bank is prepared to let a property get sold at the courthouse for eighty to ninety percent of its market value. Depending on economic times, this number can be higher or lower. The attorney representing the bank will protect the banks interest by bidding up to the value of the amount that they are willing to sell their property for. It is a myth that foreclosures get sold at the courthouse for pennies on the dollar. In reality, the bank will protect their interest up to almost the full amount
that is owed to them. This is another reason why bidding can be very frustrating at the courthouse. If the bank is the highest bidder, then the property goes back to the bank and becomes a bank owned or REO property.
REO
Real estate owned or REO properties are properties that are owned by the bank. Since banks are not landlords the first thing that they do with a property that comes back to them is they try and sell it. The way that they do this is by using “asset managers” or asset management companies which are companies that represent the banks in dealing with their REO properties.
These asset managers submit their REO properties to pre-established realtors that only work with REO properties. These realtors give their asset managers a “brokers’ price opinion” (BPO) which lets the bank know at what price the realtor thinks the house should be listed. Usually bank owned properties are listed at competitive prices in order to facilitate a quick sale. REO properties are cash only deals meaning any potential buyer needs to be pre-qualified by the bank and needs to show a “proof of funds” like a bank statement. Buyers need to show that they have the cash available to purchase a property.
Buying REO properties is not as competitive as pre-foreclosures but is more competitive than buying at the courthouse. The reason is because all of the properties are listed on the multiple listing service (MLS) so any member of the general public can have access to REO properties through websites like realtor.com and zillow.com. This makes purchasing REO properties fairly competitive although the barrier to entry is high since you need to be a cash buyer.
You cannot get a mortgage to buy a property that is owned by a bank. In fact if a bank is faced with two offers they will always take the cash offer even if it is substantially lower than any other offer. The reason is because banks need to liquidate REO properties quickly in order to avoid a bottleneck of owning too many properties. Federal regulations limit how many bad loans a bank can have on their balance sheet so banks try and get rid of their REO properties as quickly as they can.
For this reason, cash buyers that are prepared to close quickly and waive contingencies like inspections will always get the best deals. One big advantage of purchasing REO properties is a relatively free and clear title. I use the word relatively since the banks use their own title companies to close on their REO properties. Sometimes these title companies do not search for code enforcement and utility bill liens. However the marketability of the title is never in question.
Investing in Foreclosures for Beginners
When a property has a “clouded” title then the title is not “free and clear” which makes the property less attractive to potential buyers or lenders. In reality, once a “lis pendens” is filed, a property cannot be sold or refinanced without the buyer being fully aware of the fact that the “lis pendens” has been filed. The only way to get rid of a “lis pendens” is through foreclosure which wipes out a “lis pendens”.
Once a lis pendens has been filed the property is considered to be in pre-foreclosure. If you subscribe to a public database like foreclosures.com, realtytrac.com and many other similar sites you can get access to the properties that are in pre-foreclosure. You can also get a list directly from your county clerk by visiting your county courthouse. In some counties these lists are even available online.
If you are investing in pre-foreclosures you are buying a house directly from the homeowner. This negotiation with the homeowner is usually done without the banks knowledge. If you are investing in pre-foreclosures you will need to negotiate directly with the homeowner about purchasing their house. Since the “lis pendens” filing is public knowledge investing in pre-foreclosures is very competitive.
If the house has no equity then you will need to negotiate a short sale with the bank. A short sale is where a bank agrees to take less than the full amount owed to them. This occurs when a buyer is only willing to purchase the property for less than the amount owed on the mortgage by the seller. In the case of a short sale the bank is aware of the process since you will need to negotiate with them. The department at the bank that is responsible for negotiating short sales is called “loss mitigation”.
There are numerous online sources of pre-foreclosure lists which make the barrier to entry in pre-foreclosure investing very minimal. Anyone can become a pre-foreclosure investor simply buy purchasing a list of homeowners in foreclosure. Since the information is public record it can even be obtained for free by visiting your county courthouse.
For this reason, pre-foreclosure investing is fiercely competitive. Since there are so many potential pre-foreclosure investors, the homeowners in foreclosure are literally bombarded with offers to purchase their homes. This makes it difficult for investors to differentiate themselves from one another to the homeowner. Additionally there is often hostility and anger from the homeowner since they do not want to be bothered by “foreclosure sharks” or people that they perceive as trying to take advantage of their situation.
For the above reasons, pre-foreclosure investing is a difficult and competitive are of foreclosure investing. If the homeowner cannot do a loan modification or sell their house to an investor then the house goes to the foreclosure auction.