Foreclosures, bank owned properties, REO’S & short sale properties offer alternative methods to buying a home conventionally. Each option below describes a somewhat different situation.
When a borrower stops making payments on a loan, the property may go into foreclosure proceedings. The lender attempts to recover the balance of the loan by repossessing the property. The lender files a notice of default after a borrower misses a payment. If the borrower does not make the payment, then a public auction notice is recorded, including a sale date.
Judicial foreclosure is available in all states but not every state requires it. A court supervises the sale of the mortgaged property, and the process starts when the lender files a lawsuit against the borrower and notifies all parties. After the pleadings in court, a judicial decision is made on the property, with proceeds distributed first to pay the mortgage, then other lien holders, and the borrower receives any remaining funds.
No judicial foreclosure, or foreclosure by power of sale, is generally faster and cheaper than judicial foreclosure. This process may occur when a mortgage, or alternatively, a deed of trust, contains a power of sale clause (in California, most mortgages are actually deeds of trust). In these cases, the courts do not oversee the property sale, and again, the mortgage holder, then other lien holders benefit from the proceeds.
Real Estate Owned (REO)
These properties did not sell at auction or through a short sale; therefore the lender has taken over ownership of the property. The lender may be a bank, government agency or a government loan insurer. Properties become REO more frequently when the outstanding loan balance is greater than the property’s current market value. The beneficiary accounts for the property as an asset and the bank/government will try to sell the property to recover its losses. Meanwhile, the former lender must secure the property and perhaps manage maintenance, repairs and/or tenant evictions. Banks will try to sell these REO properties in “as is” condition.
A short sale refers to a property sale in which the purchase price is less than the outstanding balance of liens against the property, and the property owner cannot pay the difference. The lien holders release their lien with the sale and accept less than the outstanding amount.
A deficiency refers to any unpaid balance owed to the creditors. Different sale agreements or varying state laws can impact deficiencies. Usually borrowers must show why they cannot pay the deficiency. Any creditor holding a lien against the property, including first and second mortgages, home equity lines of credit, and homeowners’ association fees, must approve the short sale when accepting less than they are owed. Borrowers may apply to their lender for a short sale even if they have not missed payments. It is important to note that the short sale application process can take months.