It’s not the most pleasant process, but we have to talk about it. What is the foreclosure process? How long does the foreclosure process take? What happens when you can no longer pay your mortgage to your lender? This is your guide to foreclosures, and tips for real estate investors to avoid going through the process.
What Is Foreclosure?
Foreclosure is a legal term and process in which a lender, usually a bank, attempts to seize a property after the owner continuously misses monthly mortgage payments. Foreclosed homes are usually recovered and sold by the lender to secure the loan amount. A foreclosure is also sometimes referred to as a “forced sale” of a property because that’s what the lender essentially attempts to do- force sell your property to secure the loan. It’s considered one of the risks of real estate investing and of owning a rental property.
Related: Activity in the US Foreclosure Market Drastically Dropped in 2018
What’s the Foreclosure Process?
The foreclosure process isn’t different for real estate investors than it is for regular homeowners. Here’s how it looks like in 5 steps:
1) Mortgage Default
One way mortgage default can occur is if you miss your payments, by which you fail to meet your loan agreement terms. Your lender will email you, call you, and send you mail to notify you that you’ve been missing your payments. It is also possible for the lender to get in touch with you to assess your financial situation and to explore alternative options and “accommodations.” These include interest adjustments and payment adjustments, to spare you both from going through the foreclosure process.
2) You Will Receive a Notice of Default (NOD) from the Lender
The beginning of the end.
If all accommodations fail, you will receive a Notice of Default. This is a certified document which states that you’ve been missing your payments.
Is there time to salvage yourself as well as your investment property at this point?
Definitely. A notice of default doesn’t mean that your investment property is automatically foreclosed. There are multiple options to stop the foreclosure process, one of which is “mortgage reinstatement” – which is real estate lingo for paying all your due payments at once in addition to lender fees and interest payments.
3) Notice of Sale – 90 Days Within the NOD
If you can’t secure the missed monthly mortgage payments within 90 days of the NOD, you’ll receive a Notice of Sale from the lender. The notice will inform you that the lender will be auctioning and selling your investment property within three weeks, or 21 days, of the notice. During these three weeks, the Notice of Sale is also published publicly in a weekly newspaper.
Is there time to salvage yourself as well as your investment property at this point?
Also yes. You can reinstate up to 5 days before the auction date (explained below).
4) Auction
The investment property is auctioned publically and is sold to the highest bid. The highest bidder would have to pay the full bid within 24 hours, and they become the owner of the property.
5) What If My Property Doesn’t Sell in the Foreclosure Process?
If the property doesn’t sell, it is considered Real Estate Owned property or REO. This means that your investment property is now owned by the lender.
A Quick Note…
With reservation to the above, it’s important to note that the foreclosure process varies from one state to the next. One major difference is between a “judicial foreclosure process” and a “non-judicial process.” With judicial foreclosures, the bank has to go through a longer process and file a lawsuit at court. For non-judicial foreclose, the bank doesn’t have to go through courts and the process is carried out by a “trustee.” There are a few other legal differences between states, so make sure to research your specific state’s foreclosure process and laws.
How to Avoid Foreclosure
1) Ever Heard of “Prevention Is Better Than Cure”?
If you buy a positive cash flow property, to begin with, you can guarantee a constant flow of income every month. You can use part (or all) of this as payments for your mortgage, which will help you avoid foreclosure altogether. One way to find positive cash flow properties is through Mashvisor. Our varied tools like our investment property calculator, as well as heatmap and comp analysis, allow you to look for and analyze investment properties in your area of choice.
Related: Investment Property Calculator – A Simple Guide on Using it
2) Manage Your Spending and Expenses
This one seems like a no-brainer, but it can actually make a huge difference.
When paying off a mortgage, learn to prioritize your rental property expenses (as well as your personal ones), and always leave a portion of your income set aside. Paying your loans should be your number one priority. So if you feel like you’re struggling financially, save your rental income, and cut down as much of your costs as possible. Always keep in mind that you’re paying off a mortgage. This will help you avoid the foreclosure process before it even becomes a problem.
A real estate investor can also try to increase his/her cash flow, which is easier said than done. You can do that by picking up some extra work, renting part of your own property, etc.
3) If You Can Reinstate, Do So
The period of reinstatement goes on for 5 days before the auction date. If by this time you managed to secure payments, go ahead and pay. You’ll save yourself and your real estate investment property.
4) Don’t Ignore Mail
I feel like this shouldn’t be on here, but we’re all guilty of putting off opening mail every once in a while. But even if you feel tempted to, never, ever ignore mail from your bank, especially if you know you’ve been missing payments. Your bank sends you important documents, including ones on how to avoid foreclosure. So make sure you constantly check it.
5) Get in Touch with Your Bank
When you receive your NOD, get in touch with your lenders right away, and see if you can coordinate to avoid foreclosure. Some lenders will agree to adjust your loan or interest payments. Pick up the phone and simply ask. This may save you from going through the foreclosure process.
6) Make Sure Your Rental Property Is Not Vacant
Rental properties should be able to generate positive cash flow, even after accounting for rental property expenses. To achieve that when owning a rental property, you should learn how to find tenants to bring in rental income and maintain these tenants.
Related: 6 Ways to Get Your Investment Property Rented
Finally,
While it is considered as one of the major risks of real estate investing, you can definitely learn how to stop the foreclosure process and even avoid it altogether.
Here’s to never having to go through it!