An Insight to the Foreclosure Process: What You Need to Know Before You Decide

REO properties end up on the market or on the auction block through various processes, but they always become bank-owned after the previous borrower defaults on the loan. Properties that become bank property and are not sold at auction become Real Estate Owned (REO) properties that are handled by a specialized REO agent.

How the Foreclosure Process Works

The foreclosure process begins when borrowers fall three to six months behind on payments. At this stage, the lender files a Notice of Default (NOD), and the property enters pre-foreclosure. Once the lender has submitted a NOD to the property owner and the County Recorder, a reinstatement period begins. This period continues until five days before the official auction date. During the reinstatement period, property owners have the option to correct the default or apply for a short sale. If the default is not corrected, an auction date will be published in a Notice of Sale that is posted on the property and at the County Recorder's Office. From the date of delinquency, borrowers typically have 111 to 140 days before the property is auctioned.

After receiving a Notice of Sale, property owners still have the option of completing a short sale or correcting the default. This notice to auction the property is published publicly for three weeks leading up to the auction date. The receipt of a Notice of Sale will eventually lead to a trustee sale or auction that occurs at the local county courthouse. To complete this process, the bank sets an opening bid that equals the amount owed on the property plus any fees. If there is a high bidder, that individual will receive a trustee's deed. Unfortunately, many properties have upside-down loans and depreciated values, and bidders aren't willing to pay more than the property is worth. In this common scenario, the property becomes a REO asset that the lender must maintain until a buyer is found.

Investing in REO Properties

While REO status isn't good for banks and lenders, it's great for investors and serious buyers who are interested in acquiring foreclosures at deep discounts. Buyers who work with a foreclosure specialist have one important advantage. A REO buyer will always receive a clean title. Properties purchased following foreclosure have all junior liens wiped out, and the new buyer is only responsible for unpaid property taxes.

Working with a certified foreclosure agent is the best way to locate available REO properties. REO agents with Allied Commercial Real Estate have been hired by lenders to maintain and list bank-owned properties. They can also provide valuable Broker Opinion of Values (BOVs) and Broker Price Opinion (BPO) assessments. Unlike an appraisal used for financial underwriting, these subjective assessments are based on actual property values. A detailed BOV or BPO assessment can tell the buyer a lot about current rental rates in the vicinity, asking prices, closing prices and demographics that help buyers understand how a revenue-generating commercial property can be a successful investment.

Working with REO Agents

A foreclosure specialist and REO agent can ensure that the property being purchased is in top condition. Specialists with Allied Commercial Real Estate are responsible for everything from lockouts and rekeying to maintaining and listing the property in national foreclosure databases and marketing the property through print and web advertisements and multi-channel campaigns. A trusted REO specialist helps the bank maintain the property and ensures a minimal amount of improvements are needed once a new buyer invests in the property. When buying foreclosed properties, a reputable REO agent makes all the difference.

This Article is designed to be of general interest. The specific techniques and information discussed may not apply to you. Before acting on any matter contained herein, you should consult with your personal tax and/or legal adviser.