So… ready to buy your first foreclosure?  You have your list of sales.  Money is lined up.  You’ve gone to the sale a few times.  You are ready to take the first step to becoming a foreclosure investor.

Not so fast.

First, you need to learn the “10 Commandments of Foreclosure“.  Not exactly written in stone, but ignore these rules at your peril:

1. Know thy Process
2. Know thy Property
3. Know thy Title
4. Know thy Parties
5. Know thy Occupant
6. Know thy Judge
7. Know thy Repairs
8. Know thy Exit Strategy
9. Know thy Buyer
10. Know thy Closer

We will tackle Process, Property and Title in Part One.

In Part Two we will address Parties, Occupant and Judge.

Part Three will walk you through Repairs, Exit Strategy, Buyer and Closing.

When we are done with this series, you should be fully prepared to bid at a foreclosure sale… or you should be too scared to bother.  Either way, here’s what you need to know…

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10 Foreclosure Commandments Part One

#1 – Know Thy Foreclosure Process

I invest in a judicial foreclosure state – Florida – and this post (and this entire site  for that matter) is based on that experience. Every state has a slightly different foreclosure process.  The major difference depends on whether the state uses mortgages or deeds of trust when a property is purchased. Usually, states with mortgages use judicial foreclosures, while states using deeds of trust have non-judicial foreclosures.

Judicial Foreclosure

Judicial foreclosure means exactly what you think it means– a judge rules in a court action.  When a borrower is in default, and the lender has decided the default won’t be cured, a lawyer gets involved.  The lender’s lawyer then files a law suit (the foreclosure case) and a lis pendens (public notice that the property is involved in a pending law suit).  The lawsuit then proceeds in accordance with the state foreclosure statutes, court rules and rules of evidence.

In Florida, the lis pendens is the first notice that a property is in foreclosure.  Old real estate books talk about contacting the owner when the lis pendens is filed.  That’s a high volume, low yield approach in today’s market, but if you are persistent, you can find deals, and you will find them earlier than anybody else.  Just treat them like short sale leads- not as foreclosures.

A judicial foreclosure can take as little as three months.  In reality, we regularly see cases filed three or four years ago.  As the banks start to unload their shadow inventory, move past the Robo-signing scandal, and the market recovers, the time for judicial foreclosure should drop back to under twelve months.

Non-Judicial Foreclosure

Non-judicial foreclosures are based on deeds of trust.  The deed of trust provides that the trustee has a power of sale.  This clause lets the trustee start a mortgage foreclosure without having to go to court.

The trustee is typically required to issue a notice of default and notify the trustor (borrower/homeowner) accordingly about the default. If the trustor does not respond, the trustee then initiates the steps for conducting the mortgage foreclosure sale of the home.

The Sale

The court oversees the entire foreclosure process, and once the lender has proven the default, a final judgment is entered and a Notice of Sale published.  The Final Judgment gives the borrower one last chance to pay the loan off, and if that isn’t done by a specific date, the property is auctioned by the Clerk of the Court.  So your first step is to fully understand the clerk’s process.

Most of what you need to know about the sale process is on the Clerk’s website.  If not, go to the Courthouse the day before, and ask all the questions you want.  DON’T be the ass that holds up the sale and costs a room full of people valuable time by asking a series of stupid questions at the start of the sale. (If your mom told you there is no such thing as a stupid question, she was flat out wrong…. a good question asked at an inappropriate time is stupid, right?)

So at a minimum, you need to fully understand the answers to the following questions:

• Are auctions online or live?
• Do you have to register to bid?
• How much is the deposit?
• How long you have to pay the balance?
• What forms of payment are permitted?
• When you will get a receipt of the sale?
• When you will get title?
• What can hold up title?

That last point is probably the most important.  For some reason, people think they own the house the minute the sale is over.  Not necessarily.  In Florida, the borrower still has a right of redemption up until the time the Certificate of Sale is filed by the Clerk.  So if you have until 4:00 the next day to pay the balance, but the borrower pays it off first, you won’t get the property. You must know your state’s right of redemption.

Also, most states allow objections to the sale process. For example, if the lender’s representative misunderstood the bidding instructions and let the house go way too cheap, the lender will object to the sale.  Whether they win or not is a completely different story (actually… that’s a whole book).  But ANY interested person can object.  We’ve had objections from the plaintiff, the borrower, the tenant, a guardian, a lienholder… and ALL of these objections delay your title and possession of the property.

Also, be aware that the borrower may be waiting until the last minute to file for bankruptcy protection.  If a suggestion of bankruptcy is filed in federal court before your Certificate of Sale…. the sale is void and you don’t get the property.  Or even more nasty… if the bankruptcy is filed AFTER your sale receipt but before you get title, you may have to go to the bankruptcy court for relief from the automatic stay of bankruptcy.  In other words, you paid for the property, but you might have to wait a few months to kick the owners out.  That really kills your return on investment if you are borrowing money or planning a quick flip.

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#2 – Know Thy Property

Now you need to analyze each property to decide what you are willing to pay.  Small time investors pick just one or two properties.  That’s a mistake.  A real investor is going to analyze every property being sold… or have a good reason for not evaluating a specific property.  In today’s foreclosure environment, the vast majority of purchases are made when the lender discounts the mortgage.  And predicting which lender/servicer/trustee is going to discount a specific property is guesswork.  So if you want to buy, you better be ready to act on every single property.

Everybody has their own way of analyzing a property.

You can’t know too much about the property.  Impossible.  Gather as much data about each case file as you can.  I always get the following for each property scheduled for auction, at a bare minimum:

• Address
• Tax ID number
• Tax assessed value
• Zoning and Land Use
• Construction type
• Square feet living space
• Square feet other space
• Other structures or improvements
• Number of bedrooms, baths and garage bays
• Annual tax bill
• Septic/Well/City Water/Sewer
• Outstanding property taxes
• Is the property listed on MLS?
• Property Condition and Quality
• List of needed repairs
• Any Open Permits
• Who built the home?

Most of this information is in the court file (especially the Final Judgment and Notice of Sale), or the property appraiser, tax assessor, building department, zoning office, utility companies, etc.  The rest requires a site visit– a visual inspection of the property before the sale — especially the property condition and repairs.

Google Map’s streetview is great for eliminating properties, but since some of the maps are really out of date, you can’t rely on it for deciding a property is in good shape.  Nothing really substitutes for a site visit.  Streetview won’t show you a missing AC, foundation cracks, or other problems.  But it may give you enough information to decide it isn’t a n interesting property or neighborhood.

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#3 – Know Thy title

Almost every foreclosure comes with a huge caveat: title is not guaranteed or warranted.  Not at all.  There is no assurance the foreclosure sale is going to give you anything other than a sale title.  And there is no assurance you will get possession of the property, even after you own it (See the next post on Know thy Occupants).

In a perfect world, the foreclosing attorney has named all other lien-holders, and the final judgment has wiped out those liens.  However, only fools rely on the foreclosure case to give clean title. So you need to research marketable title (or have a title company or lawyer search it for you) before buying the property at the foreclosure auction.  Start by making sure you are bidding on a first mortgage.  Then pay special attention to:

• Code enforcement liens
• IRS tax liens
• Criminal court cost liens
• Creditor judgments
• Unpaid Taxes
• Superior mortgages
• HOA or Condo liens
• Adverse possession claims

You need to learn to search title yourself.  Or hire someone.  Or grow your business to the point where you hire an assistant who does it.  Title companies and lawyers are not going to return your call when you ask for 20 title free title searches.  But you simply can’t take the risk of buying without a search.

The Casefile

Title problems are my favorite “stick”.  And my favorite title problem is a procedural issue. The Noob that has been coming and getting more aggressive with bidding against me (or piggybacking) is a prime target to stick with a hard-to-spot procedural title problem.

When I’m hunting for a stick, I take the time to read the whole court file.  A surprising number of judicial foreclosures have procedural defects.  Someone didn’t get properly served.  An estate required a guardian ad litem.  All of these procedural problems will be hard to spot… and generally ignored.

How do I use those details to stick? Well…… actually, no….. I think I need to keep some of the fun parts  secret.  Let’s just say that if you are the Noob and you are bidding against me or piggybacking on my bids, you might want to take the time to read the entire case file… very carefully.

–Dave Midgett

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 –TO BE CONTINUED–

10 Commandments of Foreclosure –PART TWO—

#4- Know Thy Parties

#5 – Know Thy Occupant

#6- Know thy Judge

10 Commandments of Foreclosure –PART THREE—

#7- Know thy Repairs

#8- Know thy Exit Strategy

#9- Know thy Buyer

#10- Know thy Closer