Some home buyers looking for a great deal in real estate markets probably consider buying foreclosures. Foreclosures are often very good value but there is a lot to consider before purchasing a distressed property.
For starters, a foreclosure occurs when a homeowner can no longer afford to make their monthly mortgage payments. The lender and borrower cannot agree on a solution and the lender ends up repossessing the house, after a long court process. This puts the property into foreclosure and it gets listed as “bank owned” or “REO”. When a borrower does not pay their mortgage and the loan goes into default, the lender will file a public default notice through the courts, called a Notice of Default or Lis Pendens (lawsuit pending).
The typical foreclosure process usually ends in one of these ways:
- The borrower reinstates the loan by paying off the defaulted amount during a grace period after the foreclosure process has begun, as determined by state law.
- A third party purchases the property at a public auction and receives a certificate of sale, which is followed by a Sheriff’s Deed.
- The borrower attempts to sell the property to a third party during the pre-foreclosure period. The sale allows the borrower to pay off the loan and avoid having a foreclosure on their credit history.
- The lender takes ownership of the property with the intent to resell it.
In Arizona, most foreclosures are non-judicial. This means lenders avoid going to court by instructing the title company (who holds naked title on the property) to proceed with a Trustee Sale. This allows the borrower in default 90 days to reinstate their loan into good standing before the property is sold at auction. The good news is that in the event the auction price does not cover the mortgage balance, there is no deficiency judgment awarded to the lender. This means they cannot go after the borrower for the difference.
Sellers stop making mortgage payments for many reasons. Some do it because of economic hardship, others cannot justify paying an inflated mortgage for a house that is no longer worth the original purchase price. Other reasons for foreclosure include medical emergencies, unemployment, excessive debt to income, divorce or job transfers.
Bank owned properties can be great deals for the right buyer, but potential buyers must remember a foreclosure is usually sold “as-is”, which means there is no guarantee of the property condition and no repairs will be made.
When sellers no longer care about their home and know they are about to lose it to the bank, they often give up maintaining it. Some disgruntled owners even become destructive. It isn’t uncommon to find a foreclosed home with vandalism, kitchen cabinets missing, bathroom fixtures missing or an entire yard of dead plants. Sadly, some people will even leave their own pets behind in the empty house!
