Some of my clients have been asking me if I have been seeing more foreclosures in our market place. Some have also been curious as to what I think about foreclosures as a vehicle to potentially buy property for less than market value.
To better engage in this conversation I feel that it is important to understand the mechanics of a foreclosure proceeding from start to finish. Let’s layout the steps in a foreclosure proceeding from a person first being delinquent in a payment, to having their house put on the market by their lender, to the home finally being sold to a new owner.
1) Demand Letter
The demand letter is the first step in the foreclosure proceeding. It is made on all of the owners of the property, all of the people who are named in the mortgage and the guarantor if there is one.
To start a foreclosure action, a formal application is made, in writing, to the court requesting judicial action. This declaration of facts is called a petition. The petition is also served to anyone whose interest may be affected. Examples would be: the registered owners, tenants, guarantors, and any other mortgage or insurance holders. Included in the petition is a request for an order for sale.
The affidavits are sworn, written declarations and proof that the mortgage is in default, and that the mortgagee served the mortgagor the demand letter. The affidavit is registered at the same time as the petition.
If the owners of the property or the people being foreclosed cannot afford to redeem the mortgage, they should file an Appearance at the courthouse. An appearance is a court document by which individuals indicate they will defend or otherwise participate in legal proceedings against them, or in which they have interest, which might be affected by such proceedings. There is no cost to file an appearance in the courts, however if there is equity in the property the owners should hire a lawyer to help protect them.
5) Notice of Hearing of Petition
This sets out the details of the hearing. It will specify the court date, time, and location of the hearing.
6) Order Nisi
The Order Nisi is the first order of the court. It establishes, among other things, the amount required to redeem the mortgage and the time given to the borrower to redeem. Generally, the more equity someone has in their home the longer the redemption period will be.
7) Certificate of Pending Litigation
Once the Order Nisi has been granted, a certificate of pending litigation is filed in the Land Title’s Office. The purpose of this is to prevent the current owner from selling the property before the foreclosure action has been concluded.
8) Redemption Period
The court grants a time frame for the owner to redeem their property. Generally, this period is anywhere between one day and six months depending on how much equity the owner has in their property.
9) Order for Conduct of Sale
Once a property is subject to foreclosure proceedings anyone who may be potentially affected by the foreclosure action may apply to the court for an order for conduct of sale. This allows the court to instruct that the property be listed for sale and it prevents anyone else from listing the home (even the owners). It also lays out how much real estate commission can be paid.
10) Order Made After Application
The court order that approves the sale of the property.
One last option is an Order Absolute where the lender actually takes ownership of the property and the sale can proceed as any other sale.
As a consumer your opportunity to purchase a foreclosure property starts when the order for conduct of sale has been granted and the home is listed for sale.
The biggest difference is the way the offer is structured. To summarize, the property is sold as is, meaning that on the possession day the purchaser has little to no recourse if things are damaged or taken away. You also can’t ask for chattels to be included (fridges, washing machines, stoves, window coverings, etc.)
The next part is completion and possession. When purchasing a foreclosure, the offer won’t specify a completion and possession date. Generally this is written 28 days after court approval if the home is occupied; if it is vacant it will be 10 days after court approval. The court may specify a longer period if they see fit.
The first offer that is accepted may have conditions on it like home inspection, fire and property insurance, title search, etc. Once conditions are removed, a court date is set.
If the first offer is the only offer, the court will decide if it is reasonable and will accept it.
This being stated there can be more than one offer show up to court and there could now be a multiple offer situation.
All offers on the court date must be condition free, have a bank draft for the deposit accompanying the offer and have signed off on the Financial institution’s Schedule A.
So basically, even if you are the first offer accepted you may get outbid at court and be left with nothing.
Purchasing a foreclosure can be an opportunity but as you can see there are pitfalls along the way and the process definitely lacks certainty for the buyer.
That said, the process is intimidating and provides no guarantees, which tends to eliminate a large percentage of the buyer pool.
I hope this gives you some insight into how a foreclosure works. If you have any questions about this process, investing in general, or anything else related to real estate please feel free to give me a call, text or email.
I am always here to help.
Fill out the form and one of our highly skilled staff will get back to you within the next business day.