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Foreclosure Overview  | $1.01 is not normally enough to stop foreclosure. |  |  | Not exactly what happens. Actually, the people move, not the house. |
Foreclosure is the process of losing any rights to a home due to a host of reasons, including but not limited to:
1) Delinquency in payment of a note or loan
2) Violation of provisions in a deed of trust
3) Delinquency in taxes
4) Non-payment of homeowner's association dues
Foreclosure does not "take the property" from a homeowner - in some cases foreclosures occur AFTER the homeowner has already deeded away his interest in the property. The lender may stil foreclose out any interests that the homeowner (or new homeowner) retained regardless of them having been given to someone else. It forecloses any right any previous owner may have had to the property. Deeding the property to the new, rightful owner occurs after foreclosure.In Texas, foreclosures must be announced publicly at least 21 days before the date of sale. And the date of sale is a first Tuesday of the month at a central location determined by the county. Typically, this occurs on the courthouse steps, or in Harris County's case, at the Family Law Center at lll5 Congress.
The foreclosed rights are sold at auction to the highest bidder. Generally, only cash, money order or cashier's checks are accepted and must be paid within an hour or so. The winning bidder gets a receipt. Days to weeks later, a deed is issued and/or recorded into the winning bidder's name.
It is not a General Warranty Deed, which gives assurance to the validity of the deed. It is a Substitute Trustee's Deed, which only grants rights that the foreclosing party had the legal right to grant. That means a winning bidder could be getting the deed to a property from a foreclosing second mortgage.
A second mortgage does not have the right to take away the rights of the first mortgage. The investor's ownership then will be subject to payment of the first mortgage.
RISKS OF BUYING FORECLOSURES
No inspection. No warranty. No option period or escrow. No title insurance. No guaranteed first lien position. Liability on property. Former owners upset and still living in house and whom you must evict.
All balanced by a potentially super-low price.
Most of the risks involved in foreclosure are manageable (advanced foreclosure risk management).
To understand the risks, here is a brief synopsis:
1) Difficult to verify property condition. Horror stories on "what's inside" are endless. One noted wholesaler in Houston was trying to unload a property with a 1.5 foot high bulge in the foundation in the middle of the living room floor for over a year. Not something an experienced investor would have missed during a property inspection. But when buying at auction, you do not have the right to property inspection.
2) Title risk. Clearly, if an investor knows whe position of the foreclosing lien and the amounts of any superior liens, then the investor can factor that information into his bid for the property. There is no central information source that makes finding that answer easy or inexpensive. A mistake, which is not uncommon, can cost the entire investment. One of our very first deals was trying to buy a deed off of an investor who had purchased property at the foreclosure auction. He mistakenly thought it was a first lien. It wasn't. He lost $20,000. And that is a small mistake.
3) Cash purchase. No givebacks. No exchanges. Having the money in an account ready to jump on opportunity. Much riskier from a capital perspective than the ever-popular no-money down strategies. Once you give your cash, you cannot change your mind or get your money back.
4) Execution risk after purchase. After purchasing a property, you have multiple tasks to perform or risk any profit you may have otherwised earned. Tenants(or former owners) must be removed with little damage. Back taxes may be owed, to which the property will be subject. Title insurance can take a long time to obtain.
These risks play out differently in each type of foreclosure auction.
Read our Foreclosure types overview: FORECLOSURE TYPES OVERVIEW
If you have questions and would like more dedicated and one-on-one/small group education, we can set up live in-person or on-the-job learning sessions - upon request or at a regularly scheduled time.
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