Anatomy Of A ForeclosureForeclosures are occurring daily at alarming rates across the country. With so many homeowners experiencing an increase in monthly mortgage payments due to interest rate adjustments on their adjustable rate mortgages (ARM), the foreclosure epidemic continues to spread. This unfortunate situation has resulted in an influx of below market value properties. We now see properties being sod for pennies on the dollar and real estate investors are clamoring at the opportunities. For those seeking to understand the foreclosure process, here we will explore and dissect the elements.
- Notice of Default.
In title theory states, the lender holds legal title to property and the borrower retains equitable title. Equitable title allows the borrower to retain the right to live in the property, improve it, rent it and enjoy it. Legal title transferred once the mortgage has been satisfied. The lender holds the property for security purposes and the borrower has right of possession. Title is transferred to the borrower once the loan has been satisfied. In the event the borrower defaults on the loan, the lender has immediate right to possession and any rents or income from the property. (See the Title/Lien Theory Map for states)
In lien theory states, the borrower holds legal and equitable title to the property and the mortgage becomes a lien on the property. The lien is released once the mortgage has been paid in full. In the event the borrower defaults, the lender must go through the formal foreclosure process to obtain legal title. In some states, the process includes a statutory redemption period in which the borrower can redeem the property. The foreclosure process can be very lengthy and costly for lenders.
Some states have adopted the intermediary theory, which is a hybrid of the lien and title theory. In intermediary theory states, the borrower retains legal and equitable title and the mortgage is a lien like the lien theory states. However in the event of default, the lender is allowed to take possession of the property like the title theory states (utilizing the foreclosure process governed by the state). For example, Illinois is a intermediary theory state and the foreclosure process takes about 12 months. In addition during the foreclosure process, the borrower has a redemption period which allows them to reclaim the property by satisfying the delinquent payments.
The pre-foreclosure process creates opportunities for investors to work a deal with the homeowner to satisfy the delinquent mortgage in exchange for deed to the property. There are a wide variety of ways to structure these deals that include (“subject to approval”) existing loan staying in place, cash payments, and short sales. Bottom line: Buying before the close of the foreclosure process presents opportunities for investors to profit.
- Sheriff Sale.
- Real Estate Owned (REO).
Homeowners For homeowners, foreclosures can be a nightmare. There are many legitimate organizations that assist homeowners that are facing foreclosure. If you are a homeowner facing foreclosure, visit http://www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm to locate HUD approved counseling agencies in your area.
Investors For investors, foreclosures can be opportunity. It is no secret that investing in real estate is a viable mean for creating wealth
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Tony is a was trained by the best in the business, Ron Legrand. He and his wife Lisa Severino started a business from nothing and created one of the largest Real Estate Business in the Chicago area.
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Tony Severino,Real Estate Mentoring, Real Estate Training