In Part 1 of this series, Understanding the Foreclosure Process - Current Trends, we looked at reasons why lenders are increasing their efforts to work out delinquent loans with homeowners. However, in some cases, delinquent homeowners get just too far behind to warrant any sort of workout plan. In this case there are three alternatives that a lender has to foreclose on a home.
Deed In Lieu Vs. Foreclosure
A Deed in Lieu of Foreclosure is a process in which the lender takes over ownership of the property by the borrower voluntarily deeding the property to the lender.
This process is useful to a subordinate lien holder as a means of taking over the property subject to prior liens. It can also be used by a Foreclosure investor to acquire the property either in a pre-foreclosure scenario or any time prior to the Foreclosure sale.
When taking a Deed in Lieu of Foreclosure, it is critical to obtain a title search and title insurance. The person taking the deed must verify that that they are not aware of any liens on the property. For example, if a second lien holder takes a Deed in Lieu of Foreclosure on a property encumbered by other subordinate liens such as judgments or income tax liens, those liens will remain on the property.
If there are other subordinate liens, the Foreclosure will wipe them off the property. If there are subordinate liens, the second lien holder or Foreclosure investor might be able to negotiate to pay off these lien holders at a substantial discount.
Trust Deed Foreclosure - Non Judicial Trustee's Sale
The Trustee’s Sale option is almost always used by lenders in California and Arizona. This procedure does not involve a court action. All notices for this action are made by recorded documents and certified mail.
Steps In A Non-Judicial Trustee’s Sale
- The Beneficiary (Lender) instructs the Trustee to force the sale through a Statement of Breach. If the Beneficiary wants to change the Trustee, they do so through recording a Substitution of Trustee.
- The Trustee records a Notice of Default and Trustee’s Sale which states the date, time and place of the sale. The Trustee’s Sale cannot be held sooner than the 91st day after recording the “NOD”. Copies of this notice must be sent to anyone who has a recorded interest in the property, including other lenders and anyone who has recorded a Request for Notice of Default.
- The debt is not accelerated. The borrower (Trustor) may cure the default by paying all of the back payments plus penalties and costs up to the day prior to the Trustee’s Sale. This is referred to as the Trustor’s Right of Reinstatement. If the Trustor fails to cure the default during the 90-day period, the Trustee must publish Notice of Default and Trustee’s Sale for 21 days in a publication of general circulation in the area in the legal notice section.
- Again if the Trustor fails to cure the default, the Trustee’s Sale is held. The sale can be held either at the county courthouse where the “NOD” is recorded, at the property itself, or at the Trustee’s office. It is usually held at the courthouse. The lender is usually the highest and only bidder. The Trustee then conveys a Trustee’s Deed to the bidder subject to all prior liens and encumbrances. Subordinate liens are wiped out.
- There are no redemption rights after the Trustee’s Sale.
- If the borrower is still in possession, the new owner must take an eviction action to remove the borrower. If the property is encumbered by an IRS lien after the Trustee’s Sale, the IRS has a 120-day right of redemption during which time the IRS can redeem and take ownership of the property by paying the bidder all money paid plus 6% interest. The IRS rarely redeems property, but this redemption right will prevent the owner from delivering a clear title to any purchaser until after the 120-redemption period has elapsed.
Judicial Foreclosure
This option is rarely taken by the lender for two reasons:
- It is very time-consuming, expensive and emotionally-draining as you will see when we review the steps.
- Both Arizona and California have non-deficiency statutes which forbid a lender from pursuing deficiency judgments on certain purchase money trust deed loans on real property. In as much as the option is rarely taken by a lender, they may go ahead and exercise this option that a borrower has defaulted and then reinstated a loan numerous times on prior Trustee Sale actions.
Basic Steps Of Judicial Foreclosure
- A Foreclosure lawsuit is filed in superior court, a “lis pendens” (Notice of Lawsuit Pending) is recorded and the entire remaining principal balance is accelerated. A court action takes place usually after more than a year. If the judge decides in the lender’s favor, the judge orders that the property be sold at a Sheriff’s Sale.
- The Sheriff’s Sale is held and the highest bidder (usually the lender) receives a Sheriff’s Certificate of Sale.
- After the Sheriff’s Sale the borrower still has a Statutory Redemption Period (one year in California, 6 months in Arizona) during which the borrower or any subordinate lien holders may redeem the property by paying the amount bid (often the entire loan balance), plus a statutory penalty to the Sheriff’s Certificate holder.
- If there is no redemption, a Sheriff’s Deed is delivered to the certificate holder. The Sheriff’s Deed conveys title subject to all prior liens and encumbrances. Subordinate liens are wiped out.
- If the borrower is still in possession, the new owner must take an eviction procedure to remove the borrower. If an agent is going to be involved in investing in “REO” (Real Estate Owned by the Lender) properties, either as an agent or an investor, it is important to have a working knowledge of how the foreclosure process works.
One very effective way to have a leg up is to subscribe to a service that will alert you when a Notice of Default has been recorded against a property. This will give the agent the opportunity to arrange a Pre-Foreclosure Sale either with a Deed in Lieu of Foreclosure sale or a Short Sale before the property goes into the REO inventory of the lender, where it may be subject to multiple bids by other investors.
The current expectation of the market prognosticators is that Pre-Foreclosure Sales, REO Sales and Short Sales are going to dominate the real estate market for at least the next 18 to 24 months. There will be abundant opportunities for investors.
Article written by Guaranty Title Agency of Arizona. Guaranty Title Agency has been serving the needs of the Arizona real estate community for over 30 years. During those years, we’ve developed a strong culture of valuing each client who asks us to serve them. We work for you. We don’t ever forget that. We’ll listen to your suggestions, and do everything we can to exceed your expectations. We’re your Partner for Success.
