Pre-foreclosure refers to the legal situation a property is in during the early stages of being repossessed. Reaching pre-foreclosure status begins when the lender files a default notice on the property, which informs the property owner that the lender will pursue legal action toward foreclosure if the debt isn’t paid. The property owner can pay off the outstanding debt at this point, she can reverse the default status by making up the late payments so the home is no longer in pre-foreclosure, or she can sell the property before it goes into foreclosure. When a homebuyer takes out a loan to purchase a property, he signs a contract with the lending institution to repay the loan in monthly installments. These monthly installments cover a portion of the principal and interest payments on the mortgage. He’s said to be in default if he fails to make payments for at least three months. Pre-foreclosure cannot begin until he is at least three months delinquent. A pre-foreclosure home that goes up for sale is typically referred to as a short sale. The sale can be a private transaction between the homeowner and the buyer, but the buyer’s offer must be approved by the bank before the sale can be finalized. The purchase price may be less than the outstanding loan balance, which is why the sale is said to be “short.” Not all short sales are pre-foreclosures, however. Homeowners sometimes elect to sell their properties by any means possible before their defaults reach this stage.
A pre-foreclosed home can be inspected by the buyer before making an offer on the home. The buyer could be an investor looking to purchase the property for less than its full market value, and then sells it at a higher price for a profit. If the homeowner lists the property for sale through a real estate agent, prospective buyers will contact the listing agent. The lending bank must approve any short sale and will hire one or more real estate brokers to prepare a Broker Price Opinion (BPO)—an estimated market value based on an analysis of similar homes that have recently sold in the local market. The estimated market value helps the bank decide whether the proposed sales price is acceptable. A home that is sold during the pre-foreclosure phase can be a win-win-win for all three parties involved. The homeowner is able to sell the property while avoiding the damage that a foreclosure would have on her credit history. The buyer might be able to snag the property for below market value. The lending institution is able to effectively transfer the mortgage to the buyer and avoid the cost of going through a foreclosure. But buyers of pre-foreclosed homes should be aware of any property liens or unpaid taxes on these homes because these can potentially become their responsibilities after they purchase the properties. The buyer should also factor in the costs of repairs and renovation if the pre-foreclosed home is in a poor state, or he might risk ending up with expenditures that surpass his budget. If the homeowner does not cover the due payments and does not sell the home during the pre-foreclosure period, the lender will eventually sell the property, typically at auction. The bank owns the property at this point and is more likely to try to sell the property at an even lower price rather than maintain its ongoing expenses, such as taxes and insurance. Mortgage lenders take possession of real estate to recoup losses on a defaulted loan. The steps in the foreclosure process are governed by California law. When foreclosure begins, the lender obtains a title report or title guarantee to verify certain information about the property.
A title report, also called a title guarantee or trustee’s sale guarantee, is issued by a title insurance company and contains public records concerning the property in foreclosure. The foreclosing agent verifies the names of all owners of record and other interested parties so that they can be notified of the default and all phases of the foreclosure proceedings. Most California home loans are subject to non-judicial foreclosure; however, when a foreclosure requires a court judgment, or judicial foreclosure, the lender may use a type of title report called an abstract of title. A title report includes a legal description of property that serves as collateral for the loan in foreclosure. This ensures that the legal description contained in the loan documents matches the legal description on file with the recorder’s office or other record’s authority within the home’s jurisdiction. The title report typically includes a survey or map of the property, which illustrates the location of the property and its boundaries. The map or survey may also show the property’s orientation in relation to adjoining properties. An abstract of title contains a survey or other recorded illustration of the property. The sequence of liens appearing in a title report determines the priority for repayment of liens. The sequence of priority typically runs in this order: federal IRS liens, local property taxes and assessments, the first mortgage holder, home equity or line of credit lenders, and miscellaneous liens and court judgments.
If a first mortgage is foreclosed and the property is sold at auction, or title reverts to the mortgage lender, subsequent liens are extinguished, or wiped out. Mortgage lenders rely on title reports to ensure that all parties with a recorded interest in the property are notified of foreclosure proceedings. One of the trickiest aspects to buying during this stage of foreclosure is finding properties. That’s because some of these houses are not yet on the market. Start your search by looking on Zillow for pre-foreclosures. This information is free after you register with a free account. Or, check your local newspaper for foreclosure notices. You may also want to market yourself with online postings, signs, fliers or postcards with a message such as “Willing to pay CASH for your home.” Once you find a property, go see it so you can get a better idea of its location and condition. This could facilitate a casual meeting with the owner or a chatty next-door neighbour. Remember, the owner is probably still living in the home, so be judicious. It’s not uncommon for homeowners to resolve their financial problems, so you need to do your homework and verify whether the property is still in default. The trustee who filed the paperwork to initiate the foreclosure should be able to provide this information. Or, contact a local foreclosure specialist to help you. Once you’ve done considerable homework, it’s time to contact the homeowner by letter or phone call and let them know that you’re interested in their property. Remember that homeowners facing foreclosure are distressed, so enormous amounts of tact are required. Try to arrange a meeting so you can get a better look at the property and potentially discuss a possible sale. If the owner is willing, take a tour of the property. Determine how much you’d need to spend on repairs and subtract that amount from your breakeven number. If you’re not comfortable estimating repair costs, consider taking your contractor along for the tour — just remember to be considerate of the owner’s circumstances. Many factors will figure into your offer, including regional real estate appreciation and the potential for increasing value. Ideally, your offer will be considerably lower — perhaps 20 percent or more — than your breakeven number.
Be creative. For instance, an owner may be more willing to flex on price if you allow them to stay in the property for 30 to 45 days while they find a new place to live. Once a deal has been reached, draw up a purchase agreement. If that’s not within your realm of expertise, turn to either a real estate agent who specializes in foreclosures or an attorney for assistance. Make sure that the agreement makes the deal contingent on a full title search conducted by a title company and a professional inspection of the property. An escrow company, which acts as a third party, can manage the transfer of money and property ownership. Not all homeowners will welcome your interest in their pre-foreclosure home — and that’s fine. Others, however, will realize that, by selling during this stage, they may be able to salvage some equity and minimize damage to their credit record. Quite simply, a title is the right to own a property, and a title report is a record of that ownership. The title report also contains other crucial information you need to evaluate your potential investment—such as liens against the property, easements, and CC&Rs. That’s why it’s so important that you review the report carefully. Do not skip or rush this step. If you’re bidding on a property listed on an auction site like Auction.com, be sure to review the Foreclosure Property Report on the Property Detail Page. But because many foreclosure properties are sold “as-is,” it’s your responsibility to contact a local title company to do a full title search of the public records concerning the property. The title company or a real estate attorney can help you review the report. When a property changes hands, the transfer is recorded in the public records. As the home is sold over time, the title report will list the date of each sale as well as the names of the parties in each transaction.
A lien is a legal interest in a property. It applies to—and stays with—the property itself, not its past owner. A title report might list several different liens:
• Property taxes: When property taxes become delinquent, the local taxing authority can place a lien on the property in the amount of the past due taxes, plus interest and penalties. Property tax liens are issued a so-called “superior” status, which means that if the property is sold, property taxes must be paid before any other existing liens.
• Mortgage liens: This is perhaps the most common form of a lien. The buyer may be listed as the owner, but the mortgage company has a legal interest in the property as well. That interest must be paid in full when the property changes hands.
• Mechanic’s liens: This is a lien formed when a contractor begins work on a home. It ensures the contractor will get paid. If the owner and the contractor get into a spat and the owner refuses to pay what’s due, the contractor will leave the lien in place.
• Income taxes: If a property owner falls behind on income taxes, a lien will appear on the title report, even if the owner makes a payment arrangement with the IRS.
Other legitimate liens include liens for unpaid child or spousal support, or judgments filed as the result of a lawsuit. An easement (also known as a right-of-way) gives access to third parties other than the owner. Someone with an easement can cross your property line without receiving prior permission. The title report identifies an easement’s location as well as the person or entity to which the easement was awarded. Most easements are issued to utility companies; the easement grants the utility company access to its equipment. That doesn’t sound like a problem—unless the equipment is buried in your back yard.
The utility company can dig up your yard to reach it and isn’t required to compensate you for any damage. In another case, you might discover that your neighbour has the right to use your driveway. CC&Rs (Covenants, Conditions & Restrictions) are rules that property owners must follow if the home is part of a homeowners association (HOA) or planned unit development (PUDs). CC&Rs can limit anything from the size of a driveway to how tall you can grow the grass in your front yard. Most CC&Rs are relatively harmless, but don’t take them for granted, especially if you’re buying an investment property that you want to resell or rent. Some buyers won’t buy any property that’s part of an HOA. And if you have tenants, you’ll be responsible for making sure they follow the rules, or you risk getting fined, or worse.
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