In this module:

• Judicial foreclosure vs. nonjudicial foreclosure

• Buyer counseling on REOs

3. Foreclosures

3-1

When All Alternatives Are Exhausted

3-2

• When refinancing, short sales, and/or loan modifications don’t work, only one option:

> Foreclosure

3-3

• The type of loan instrument (mortgage or deed of trust) can help determine:

> How proceedings will take place

> Length of time to complete proceedings

> Outcome

Mortgage vs. Deed of Trust

3-4

• If loan instrument is mortgage:

> Judicial foreclosure or court-ordered action is typically used to execute foreclosure proceedings

Mortgage vs. Deed of Trust

3-5

• If loan instrument is deed of trust:

> Nonjudicial foreclosure is used

> Nonjudicial foreclosure typically takes less time than judicial foreclosure

For an overview of judicial and nonjudicial processes, see Figure 8.

Mortgage vs. Deed of Trust

3-6

Forced Sale of Property

• Foreclosure requires forced sale of property either by:

> Sheriff’s sale

> Trustee sale

3-7

Closer Look at Sheriff’s Sale

• Listed among legal/judicial notices in local newspaper

• Scheduled sale of property is published for specific number of weeks prior to sheriff’s auction/sale

3-8

Buyer Considerations

• Opportunity for property inspections can be negligible or extremely limited

• Buyers may be responsible for evicting occupants

• Buyers may be responsible for paying outstanding liens

3-9

Buyer Considerations

• Buyers may not receive clear title

• Buyers may be impacted in states that offer borrowers the right of redemption

3-10

Redemption

• Redemption period: Right of borrower to recover a property after foreclosure

• This period varies from state to state

3-11

When Property Fails to Sell at Sheriff’s Auction

• When foreclosed properties don’t attract bidders at sheriff’s auction, the property is considered real estate owned or REO

• REO means the property or asset is owned by the lender

3-12

Counseling Buyers on REOs

• Buyers who are good candidates:

> Are experienced investors

> Understand that most REO properties are sold “as is”

> Have resources to repair and rehab the property if necessary

3-13

Counseling Buyers on REOs

• Buyers who are NOT good candidates:

> “Wanna-be” investors

> Those who have contingencies, such needing to sell another residence before they can buy

3-14

Preparing Buyers on What to Expect

• “Gutted” properties, missing appliances, cabinets, wiring, siding, plumbing

• Electricity disconnected

• Structural damage

• Missing or broken fixtures

3-15

Buying REOs

• Lender’s internal cost to foreclose can be significant

• REO transactions are investment driven

3-16

Showing REOs

• Previewing REOs is an added benefit you provide as buyer’s agent

• But DON’T allow buyer client unsupervised access to REO properties

3-17

Writing Offers on REOs

• Buyer’s chance of offer being accepted greater when:

> Buyer makes offer based upon market value

> Buyer has been pre-approved for financing

> They ask for closing date that is sooner rather than later

3-18

Writing Offers on REOs

> They agree upfront to an “as-is” transaction

> They do not have any home sale or home close contingencies

3-19

Writing Offers on REOs

• Buyer’s agents should call listing agent for instructions on presentation of offer

• Listing agent then submits offer to asset manager

3-20

Writing Offers on REOs

• Counteroffer is handled through addendum, which is sent to listing agent from asset manager, who forwards it to buyer’s representative via fax or e-mail

• When offer is accepted, listing agent contacts buyer’s representative

3-21

Buyer’s Reps Should Note

• Even though offer may have been accepted by asset manager, it is common for acceptance to be subject to senior management approval

• Listen carefully to listing agents because they are an extension of asset manager

3-22

Limited Property Disclosures

• With REOs, property disclosures may be limited

• If buyer client refuses to schedule property inspection, buyer’s rep should ask client to sign an acknowledgment of waiver of inspection

3-23

Managing the Funds

• Earnest money deposits on REO transactions are handled in same way as any other transaction

• In most states, earnest money is not deposited until there is signed contract

3-24

City POS Inspection

• Some cities require a point of sale (POS) inspection to assess safety, soundness, and security of property

• Customarily, buyer corrects violations unless seller fixes them

• Many cities require escrow fund to cover costs of repairs

3-25

Final Walkthrough

• Addendum may state: “buyer to have walkthrough immediately before title transfer to ascertain property is in same condition as when purchase agreement was written.”

3-26

Closing Dates and Per Diems

• Asset managers prefer closings to take place at the end of the month

• Most sellers charge a daily penalty for every day the buyer is late in meeting the contract closing

3-27

Possible Benefits and Disadvantages

• What are possible benefits and disadvantages of buyers purchasing property at each of the following?

> Short sale

> Sheriff’s sale

> REO