Lenders foreclose in one of two ways, usually depending on the state where the property is located. Some states, such as Texas, use something called deeds of trust as security for real estate loans. The deed of trust actually transfers legal title to the lender, who is empowered to sell the property if the borrower defaults. These are called nonjudicial foreclosures or power of sale foreclosures.
In New York and other states, borrowers execute a mortgage, not a deed of trust. Generically, we usually call both of these things mortgage, but that is not strictly true. A mortgage gives the lender a lien against the property, not actual title. If the borrower defaults, the lender must file a lawsuit in order to foreclose. These are called judicial foreclosures.
In a few states, the borrower signs something called a mortgage, but it gives the lender a power of sale. Foreclosure is nonjudicial, but the judicial route is allowed and sometimes preferred if the lender knows it will have a fight over competing claims or other such issues.
That is certainly the myth, and it is true many times, but you cannot count on it. You will always have to do your research and independently calculate value before bidding. Up until recently, it was normal for lenders to loan only 75% or 80% of the value of real estate. If the borrower made payments for a few years, and if the economy did well and prices went up, you could buy foreclosures for much less than current market values. Today, with so many subprime mortgages being given many homeowners have close to 100% financing. It is much more common for them to default very early in the loan, sometimes after less than one year.
By the time of the actual foreclosure, the full principal balance of the loan, plus all accrued interest, attorney's fees, and other expenses of foreclosure could be far in excess of the value of the property. Just because a lender starts the bidding at a certain amount does not mean that number is far less than the value of the property.
On the other hand, many lenders will open the bidding at 75% of the appraised value of the real estate, even if the loan balance is much larger. That is because if the lender is the only bidder, it cannot be confident in selling the property for the full amount of the loan, plus all expenses. So, it will not bid that much, because the winning bid amount must be posted as a credit to the loan balance. If the lender bids 100% of the value of the property, paying off the loan in full, it might not be able to resell the real estate for that amount. As a result, it would have to take a loss.
With both judicial and nonjudicial foreclosures, there comes a time when the lender may sell the property by auction to the highest bidder. There must be some sort of public notice regarding the date, time, and place of the auction. Local lenders can advise you regarding the common practice in your area. In most circumstances, the mortgage lender bids the highest price, but this is not always the case. Private investors, such as yourself, can bid at those auctions.
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Note: This article was sent to us by: Wayne G. Cadill at 06282010
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