Foreclosure Overview & Foreclosure Process
Find listings of homes that are set for foreclosure through either your real estate broker, online databases or your county's public records office. The amount of available homes fluctuates each day so you need to be vigilant about your tracking system.
Hire a lawyer or real estate agent that will help you become familiar with the nuances of foreclosure laws in your state. There might be subtle contract requirements you aren't aware of or disclosure paperwork that you did not know to request. Having a second set of eyes to read over every contract will be a valuable asset during your transaction.
Conduct a title check on properties you are interested in. This will tell you if there are any outstanding liens or if the county has condemned the home. Either scenario is salvageable but can require hours of attorney fees and court time.
Visit properties on the list you assembled to assess their value. Homes with obvious problems such as a sagging roof or decayed foundation might be more trouble than they're worth.
Have your Agent approach the homeowners to strike a deal on their properties. Oftentimes they would rather avoid the foreclosure process altogether and just sign a contract for less than the home is worth. However, if the homeowners are less than forthcoming about major repairs that are needed, it is in your best interest to back out and let the property go.
Pursue the properties at auction if you are unable to negotiate with the homeowners or their lenders. These kinds of auctions move quickly and you might find yourself going over budget if you cannot think rationally. Spend only what you can afford and remember that bidding extraordinary amounts on homes that are being sold "as-is" could be a financial disaster down the line.
Fill out all the right paperwork once your bids are accepted and have your lawyer or agent look everything over. Title transfers, addenda and insurance documents should be photocopied and filed with the county as well as with all parties involved.
What is Foreclosure?
Foreclosure is a process that allows a lender to recover the amount owed on a defaulted loan by selling or taking ownership (repossession) of the property securing the loan. The foreclosure process begins when a borrower/owner defaults on loan payments (usually mortgage payments) and the lender files a public default notice, called a Notice of Default or Lis Pendens. The foreclosure process can end one of four ways:
1.The borrower/owner reinstates the loan by paying off the default amount during a grace period determined by state law. This grace period is also known as pre-foreclosure.
2.The borrower/owner sells the property to a third party during the pre-foreclosure period. The sale allows the borrower/owner to pay off the loan and avoid having a foreclosure on his or her credit history.
3.A third party buys the property at a public auction at the end of the pre-foreclosure period.
4.The lender takes ownership of the property, usually with the intent to re-sell it on the open market. The lender can take ownership either through an agreement with the borrower/owner during pre-foreclosure, via a short sale foreclosure or by buying back the property at the public auction. Properties repossessed by the lender are also known as bank-owned or REO properties (Real Estate Owned by the lender).
This foreclosure process allows for three opportunities for finding bargains on foreclosure homes.
Pre-Foreclosure (NOD, LIS):
Buying a property in pre-foreclosure involves approaching the borrower/owner and offering to buy the property outright. The borrower/owner can walk away with something to show for any equity in the property and avoid a bad mark on his or her credit history. The buyer has time to research the title and condition of the property and can realize discounts of 20-40 percent below market value. When a property enters pre-foreclosure, the owner usually has at least 2-3 months to reinstate the property by paying off the amount in default. If the owner pays off the debt, the reinstatement stops the foreclosure process, so it’s important to find out if a property has been reinstated before proceeding. The best way to check if the property has been reinstated is to call the trustee or attorney assigned to the foreclosure.
Auction (NTS, NFS):
If the loan is not reinstated by the end of the pre-foreclosure period, potential buyers can bid on the property at a public auction. Buyers often are required to pay in cash at the auction and may not have much time to research the title and condition of the property beforehand; however, a public auction often offers some of the best bargains and avoids the unpredictability of dealing directly with the borrower/owner.
STEP #1 - Find and file properties
It’s important to get up-to-date auction information and act on it as quickly as possible. Develop a system to keep track of properties that interest you. A good tracking system is important since most successful auction buyers pursue several properties sometimes over a period of several months. After you find a property online, it’s a good idea to drive by the property to get a better idea of the property’s condition and the type of neighborhood. For some buyers and investors, driving by the property has also facilitated a casual meeting with the owner (you may be able to still work out a last-minute deal before the auction) or yielded a wealth of unexpected information from a talkative neighbor.
STEP #2 - Confirm auction status, location and bidding procedure
After a property is scheduled for auction, the owner has a chance (typically less than a month) to stop the auction by paying the amount owed to the foreclosing lender. It’s also not uncommon for auctions to be postponed without a new date being published. Although cancellations and postponements are announced at the time and location of the originally scheduled auction, you can call the trustee to find out beforehand. Most auctions are at a public place in the same county where the property is located. In many states, all the auctions in each county are at the same location. You can typically get that information from the trustee or the county clerk. If you call the county clerk, make sure you clarify that you are looking for the location of mortgage foreclosure auctions, not tax foreclosure auctions.
The bidding procedure varies from state to state, so you should become familiar with the procedure in your area before bidding at an auction. In some states, bidders are required to bring the full amount they want to bid in the form of cash or cashier’s check to the auction. In other states, bidders are required to bring a certain percentage (10 percent is common) of the bid amount to the auction and pay the remainder of the amount within a certain timeframe if they are the highest bidder. If you get a friendly representative when you call the trustee, you might be able to get information about how the bidding works in your area, but in most cases you’ll need to educate yourself. You could also contact a local real estate agent or attorney in your area. Of course, the best education will come from simply observing a local auction.
STEP #3 - Check potential bargain
You need to find out as much as you can about the estimated market value of the property, how much is owed on the property and if the owner has any other liens against the property. This is all public information and you can research on your own with the county recorder. The opening bid at the auction is based on the total amount owed to the foreclosing lender and may include fees incurred because of the foreclosure proceedings. If no one bids above that amount, the foreclosing lender will take possession of the property. It’s important to know this amount so you can determine if the auction represents a potential bargain purchase when the opening bid is compared to the property’s market value. You can purchase a Legal and Vesting report or Transaction History report to check for other loans the owner may have taken out and for a history of ownership. If you want to dig further into the valuation, you can order a Comparable Sales report. For a comprehensive valuation report that includes comparable sales and a list of mortgages or trust deeds on the property, you can order a Complete Valuation report. If there are outstanding liens on the property, the winning bidder at the auction may be responsible to satisfy these liens in some cases, so it’s important to check for any liens and the priority of the liens before you bid at the auction. A real estate attorney or title company can check for liens, or you can check directly with county records.
The priority of a lien is usually determined by the date it was placed on the property. So a first mortgage will usually have the first priority, and all other liens will be considered junior liens. In most states, the public auction clears out any junior liens, but there are exceptions such as tax liens, which typically will continue to be in effect after the auction.
STEP #4 - Determine bid amount
Based on all the factors used to determine the potential bargain – and your financial capability – you’ll need to determine how much you can and should bid at the auction.
Determining your bid amount is more obviously important in states where bidders are required to bring the full amount in cash or cashier’s check to the auction. You won’t even be qualified to bid if you don’t meet that requirement. If you don’t have that type of cash lying around, you have a couple options. If you own a home, you might be able to take out a home equity line of credit, which is a cash loan. If you can’t secure a cash loan, you may consider trying to buy a pre-foreclosure or bank-owned property, both cases where you can usually obtain a regular mortgage loan secured by the property being purchased.
It’s also important to determine the bid amount even in states where you don’t need to bring the full amount to the auction. By setting a firm ceiling for your bid, you’ll avoid getting caught up in the heady auction atmosphere and overbidding, which can result in little or no bargain for you. Also, if you’re not able to pay the remainder of the bid within the time frame stipulated by state law, the deposit you paid at the auction is often nonrefundable.
A reasonable purchase amount at auction is at least 20 percent below full market value, and much better deals are often possible. Other factors to consider are the rate of real estate appreciation in the area and the potential for increasing the property’s value by making repairs and improvements.
STEP #5 - Bid at the auction
Call the trustee the day before or the day of the auction to check one last time if the auction has been canceled or postponed. If an auction is postponed, the trustee should provide the new auction date.
Arrive at the auction location early and locate the auctioneer as quickly as possible. Bidding at an auction can be intimidating, especially if you’ve never done it before. Take as many cues from the other participants as you can, but don’t let them dictate how much you bid. You may encounter investors who attend many auctions every month and who don’t necessarily appreciate new competition.
STEP #6 - Take ownership
If you are the winning bidder, make sure you get the necessary documents from the auctioneer to verify that you are the winning bidder. Clarify with the auctioneer and a real estate attorney what further steps need to be made before you take ownership and possession of the property. In some states, ownership can be transferred immediately or within a few days. In other states, you may need to wait a month or more for the sale to be confirmed by a court. Some states have redemption periods for the owner, in which case the owner can buy the property back from you if they pay the full amount paid at the auction, plus applicable fees. You should avoid spending money on repairs or improvements during the redemption period.
If the trustee does not evict the current owners, you may be responsible to do this. If eviction is necessary, you can contact a local real estate attorney or the county sheriff for the proper procedure.
If the lender takes ownership of the property, either through an agreement with the owner during pre-foreclosure or at the public auction, the lender will usually want to re-sell the property to recover the unpaid loan amount. The lender will then typically clear the title and perform needed maintenance and repair; however, the potential bargain for these REO homes is typically less than a pre-foreclosure or auction property. Bank foreclosures can become government foreclosures if the loan is backed by a government agency such as the Department of Housing and Urban Development (HUD) or the Department of Veterans Affairs (VA). In that case the government agency would be responsible for selling the property. If the property is Bank Owned (REO), your first step is to contact the lender. You should contact the lender directly and ask for their REO or asset management department to find out how you can view and possibly make an offer on the property. REO means "Real Estate Owned" by the lender. It's another way to say the property has gone through the foreclosure process and has now been repossessed by the foreclosing lender.
If you haven’t done it already, you’ll want to evaluate the property’s value and check for any additional loans or liens encumbering the property so that you can make an informed decision about whether the property is a wise investment. On the Property Details page, click on the Comparable Sales section to view a report that evaluates the home’s market value based on comparable sales in the neighborhood. Click on the Loan & Lien History section to view a report that lists additional encumbrances on the property.
New Jersey Foreclosure Laws
New Jersey foreclosures are administered through the court system. The foreclosure process takes about nine months.
New Jersey Overview
Judicial, Yes - Non-Judicial Process, No - PeriodSale, 270 Days -Publication, NA - Redemption Period, 10 Day - Sale/NTS, Sheriff
Judicial Foreclosures only
At least 30 days before starting the foreclosure process, the lender mails a letter to the borrower warning of the impending foreclosure. During this pre-foreclosure period, the borrower can prevent the foreclosure by paying off the amount in default.
The lender initiates the foreclosure through the courts and records a lis pendens (notice of pending lawsuit) with the county clerk. The lender can sue for either the default payments or the entire unpaid principal balance on the loan. The borrower is notified of the foreclosure action in person or by publication if necessary. After being notified, the borrower has at least 35 days to respond or the court will make a ruling. If the court rules against the borrower, a sale date will be scheduled.
Notice of Sale / Auction
Notice of sale must be posted on the property as well as in the county office where the property is located. In addition, the notice of sale must be published in two local newspapers. One of these publications must be in either the largest municipality in the county or the county seat.
Notice must be given to the property owner at least 10 days prior to the scheduled sale.
Foreclosure sales are conducted as public auctions, overseen by the sheriff or another officer of the county. The property is awarded to the highest bidder, and the sheriff must transfer ownership to the purchaser within 10 days following the sale. The court also confirms the sale. The borrower has redemption rights during the 10 days following the sale, when any objections are considered by the court.