Most home buyers use one of two loan products to finance their purchases. Both types include a promissory note with which the buyer promises to repay the loan, plus a mortgage or a deed of trust that secures the loan by putting a lien on the home. The lien allows the lender to take back the home in a process called foreclosure if the buyer defaults on his loan. Although lenders can do and do sell foreclosed homes themselves, they do so only after the homes fail to sell at auction.
A deed of trust has special wording called a "power of sale" clause that allows the lender to repossess, or take back, the house in a non-judicial foreclosure. The lender then tries to sell the home at auction to recoup its loss. A non-judicial foreclosure allows the lender to foreclose without going to court. The lender appoints a trustee to inform the borrower that her loan is in default. If she's unable to bring the loan current before the 60-day deadline, the lender repossesses the home and appoints a trustee to sell it at a public auction.
Because a mortgage has no power of sale clause, the lender's only recourse is to sue a borrower who stops paying the loan. The legal proceeding that follows is a judicial foreclosure. A judicial foreclosure results from a lawsuit a lender brings against a borrower who has defaulted on her mortgage loan. If the lender and borrower can't agree on a repayment arrangement, the case goes to court and the judge issues a foreclosure judgment. The sheriff in the county where the home is located seizes the property, then arranges for and advertises the auction sale.
A judicial foreclosure culminates in a sheriff's sale. Sheriff's offices hold auctions according to a regular schedule that varies by jurisdiction, often right outside a courthouse. The sheriff auctions the home as-is, and buyers are usually not able to view the properties before the auction. The highest bidder wins the auction. Another type of public auction, called a trustee sale, is held for a foreclosed home secured by a deed of trust. This is a public auction that's advertised in local newspapers. In some cases, prospective bidders are allowed to inspect the home before the auction. The highest bid wins.
When a Home Doesn't Sell
Lenders take possession of homes that don't sell at sheriff's or trustee's sales and attempt to sell the homes themselves as REO, or "real-estate owned" properties. Although REOs are sold as-is, lenders sometimes do enough repairs before listing them to ensure the homes are in good enough shape to qualify for conventional and government-backed financing. REOs are listed in much the same way private sellers list non-foreclosures. Companies hire local real estate brokers to list and market them. You find foreclosures on multiple listing sites as well as listing syndicated listing sites such as Zillow, Trulia and Realtor.com.
Buying an REO
Although the lender hopes to sell an REO for market value, properties sometimes sell for substantially less in markets with a lot of REOs and relatively few buyers. Alternatively, bidding wars in competitive markets can drive prices up, so you'll need an accurate comparative market analysis from your buyer's agent to determine whether a particular REO is a good deal. It's also important to know that you buy an REOs as-is. Unless the lender has had the property pre-inspected, it has no direct knowledge of its condition. Ordering an inspection yourself is vital. In fact, your own lender will require it. Finally, read your contract carefully. The REO company often submits an addendum to the sales agreement after it accepts your offer. The addendum adds terms and conditions to the original agreement, such as an offer of fee title insurance and money toward closing costs for using the REO company's lender and title company, and stipulations requiring that you pay a daily fee, or per diem, for delaying closing. Ask an attorney to review the original agreement and the addendum if you have questions your agent can't answer.
- HUD.gov: Foreclosure Process
- RealtyTrac.com: Foreclosure Process
- Realtor.com: Buy Foreclosures at a Trustee Sale
- Putnam County Sheriff's Office: Sale Info
- HUDClips.org: What Is a Sheriff's Sale and How Does It Work?
- Firscia & Associates LLC: What Is a Sheriff's Sale? How Does It Work in NJ?
- Dauphin County Pennsylvania: Sheriff Sale of Real Estate FAQs
- RealEstateABC.com: Buying Bank Owned Real Estate
- CBVirtualViews.com: How Does the REO Purchase Process Work?
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