Foreclosure Process


What is a foreclosure? Oh, the scary, scary word of
real estate investing, that’s today’s show. Let’s dive in. [MUSIC PLAYING] Hey, everyone. I’m Clayton Morris, longtime
real estate investor and founder of Morris Invest. I’ve rehabbed
thousands of homes. And this is the show where we
talk all about buy and hold real estate for the purposes
of creating passive income and legacy wealth for
you and your family. That’s what this
channel is all about. So please, feel
free to look around. We’ve got tons of great content
here and lots of great episodes from the past where we
kind of deep dive a lot of these different strategies
and tactics to help you, as an investor. So today, we’re going to talk
about, what is a foreclosure? And of course, that
term really became popular over the
past few years, 2008, 2009 when so many people were
going through foreclosure. Well, basically,
a foreclosure is what happens when a homeowner
fails to pay the mortgage. Now the word homeowner is
a little bit of a misnomer. So yes, that homeowner, that
poor, sad homeowner, right? A more apt term would be to
call that person a borrower. They don’t technically
own the home yet. The bank owns the home. And they’re paying
off that mortgage over a period of 15, 30 years. Well, homeowner is not
quite what it means yet. They borrowing the money, in
order to live in that home. So that’s what a mortgage
or deed of trust is. It’s a loan agreement for the
purchase price of the home minus the down payment. And then that document itself,
the document from the bank, puts a lien on the
purchased property, making the loan a secured loan. What does that mean? So a lien, the bank is placing
a lien against the property. The bank has a right to
that specific property. That’s called a secured loan. When you often hear the
term unsecured loan, what does that mean? Well, there’s no piece of
property against the loan. So there’s nothing
as collateral. But the bank could take it back. It’s very rare. I mean, you’ll find
unsecured loans, of course. But a secured loan
is your typical, run-of-the-mill mortgage loan. And therefore, that’s
what would be foreclosed upon when the bank then decides
to take the property back for failure to pay them back. They have a right to that. It’s the same thing
with a car repossessed. Repo man comes, because
you haven’t paid. They have a lien
against that car. They can come and grab that car
from you if you haven’t paid. And they’ll take it back. So let’s dive into,
when a lender loans you the money without
any collateral, that unsecured loan, they’re
basically– they’re screwed. I mean, let’s be honest. If they don’t have
a secured loan against a piece of property,
or a car, or collateral, they’re just kind of going
against your goodwill and hoping that
you’re paying back. And it’s very, very rare
to find somebody that’s going to loan money against
a property and not make sure that they’re in the first
lien holder position. What does it mean to be
the first lien holder? Well, the bank who has
that 30 year mortgage, they have the first
lien on that property. So if you don’t pay,
they’re the ones that have the right
to that property. You may have a second
lien on the property. That might be a home
equity line of credit or some other refinance
vehicle against the property. They’re in second
lien holder position. So this bank has
the first position. That means if they
foreclose on it, they get the rights
to that property. The second lien holder, no. They’re basically screwed. So during the big
economic collapse of 2007, 2008, those second
lien holders, the ones that had the home equity lines of
credit on people’s properties, they were the banks that
got most screwed out of this whole process. So what happens
in a foreclosure? Let’s dive into
that a little bit. The specifics can vary, of
course, according to state law. But let’s break it down
into five key stages that I’ve written down here. Number one, missed payments– so
missed payments are the biggie. It all starts with that
homeowner, the borrower, fails to make those
timely mortgage payments. Usually it’s because they can’t. They have some sort of a
hardship, unemployment, divorce, death or a
medical challenge. Those are the main
reasons why people stop paying their mortgage. If you think about
it, the reason why I’m not a big fan of
buying raw land, for instance, as an investment vehicle, the
reason I love rental properties as an investment tool
is that, in a recession or in a hardship,
people are going to stop paying on
a piece of raw land that they own to ride with
their ATV and their son on weekends hunting deer
or something, right? They’re going to stop paying
on that piece of land first. They maybe stop paying on their
car second or maybe their boat second. The last thing that they’re
going to stop paying on is their house, their
livelihood, the place that they live. So in that situation,
foreclosures are very difficult. It
is, like, the last resort. It’s the last thing that we
want to see happen for anybody. But it also makes owning
and investing in real estate a really wise decision,
because it’s often the last– people don’t want to
lose their house, right? So they’re going to
fight tooth and nail to do whatever they
can to make sure that they can keep their house. If you’re in a tough
situation, it’s essential, though, you
talk to your lender as soon as possible. Because often, you’ll find
that they’re agreeable and that there are maybe
some options for you if you’re talking to a bank. They may want to avoid it
just as much as you do. Because the bottom
line is, banks do not want to own real estate. So if they have to
foreclose on you, it’s a very costly process. They have to file
foreclosure in the courts. It’s a costly process
for them to do this. And they don’t want to
have to hold this house. They’re banks. They make their money
off of lending money. They do not make their money
on holding real estate. Now what happens is, now
that they own that house. They have to mow the lawn. They have to keep
up with the gutters, make sure the
roof’s OK, make sure the heat is on in the house,
so that pipes don’t burst, so they get it winterized. That to pay for all of that. And if the house is
in disrepair, how are they going to sell it? They have to go
through a process maybe of hiring contractors. The bank does not
want to do that. They hate it and it’s costly. So banks will
often work with you in an effort to try to keep you
from going into foreclosure. I can tell you that. It’s 100% the truth. Sometimes, though, the
borrower may intentionally stop paying the mortgage,
because the property may be underwater. It might not be worth what
they have a mortgage on it for any longer. In other words, the
amount of the mortgage exceeds the value of the home or
because he’s just simply tired of managing the property. Those are any number of
reasons why foreclosure starts, missed payments. So whatever the
reason, the bottom line is that the borrower
can’t or won’t meet the terms of the loan. You’re going to
pay us on the first of every month, $2000 a month. That’s your mortgage. You stop paying, that’s
when it starts to trigger that foreclosure process. Missed payments is step one. Step two is public notice. Now after three to six
months– and it varies based on the state– the lender records
a public notice with the county
recorder’s office indicating that
you, the borrower, have now defaulted
on this mortgage. They have to make this public. In some states, it’s called the
notice of default. In others, it’s called a lis pendens, lis
pendens, L-I-S P-E-N-D-E-N-S, lis pendens. Or that’s Latin for suit
pending, suit pending– so again, notice of
default or lis pendens, notice of suit pending. So they have to
file that publicly. Now people know about it
out in the public now. It’s public notice. And that’s when people
can kind of– you’ll start getting
letters in the mail from people who want to try
to come in, and swoop in, and maybe save you. You’re going to
start noticing that. Because now it’s public record. So after three to
six months, that’s when this goes public,
depending on state law. And they may even be
required under the state law to put this on your front door. You’ll notice, back in
the foreclosure here, there were a lot of,
like, yellow stickers on people’s doors. They have to make the borrowers
aware that, hey, you haven’t been making your payment. But they have to do
this under state law, just in case something’s
gotten lost in the mail, which is rare, right? Oh, I didn’t pay my
mortgage for six months, because I just never got
anything in the mail. I didn’t realize it. Right. That’s total garbage. But they have to do this. And that’s part of
the bureaucracy of it. And again, this is why banks
don’t want to have to do this. It takes too long
and it’s costly. They have to send
someone out to the house, put stickers on there, file with
the county recorder’s office. It is a pain in their butt. OK, in other words, they’re
in danger of foreclosure. So you’re entering that public
notice period right now. It’s kind of that area when
you want to be careful about. Number three is the
stage of pre-foreclosure. So after receiving that notice
of default from the lender, the borrower enters
that grace period known as the pre-foreclosure time. [CHURCH BELLS RINGING] And the bells are
ringing here next to me here as I’m recording this. And that is because
that pre-foreclosure, that’s a problem. Once you get that
pre-foreclosure, step three, then stuff’s starting to
hit the fan a little bit. And during this time,
anywhere from 30 to 120 days depending on the
local regulations, the borrower can work out an
arrangement with the lender to start the short sale
process, which you may go back to the lender and say, look,
I can’t keep this house. I just can’t do it. And look, I’ve gone
through this process. I mean, I had to go through a
foreclosure in Florida years ago. It was very difficult.
And I was working with the bank on a short sale. And it was just
difficult. So you may work out an
arrangement with the bank to say, hey, look,
I have a mortgage on this property for $300,000. But it’s only
worth $250,000 now. So I’m paying more than
this house is worth. Can we work out a short
sale, where we’ll sell it for less than what I owe you? And the bank is
amenable to this. Why is the bank
amenable to this? Because they’d rather maybe
recoup some of their investment then lose all of it. So they’d rather maybe recoup
$250,000 than lose $300,000. And therefore, that
difference of $50,000 is a write off for them. That’s what so
many banks will do is they’ll write down
that capital loss. So a short sale is
always an option. It’s something you should
definitely talk to them about. But if you’re an
investor, short sales are a fantastic opportunity
also to come in and purchase property. I think the first two
properties that I ever purchased were short sales as an investor. So they’re few and far
between these days. And foreclosures are
very few and far between. I can count on one hand this
year how many foreclosures we’ve bought. They’ve just dried up. They’ve just dried up. It’s very difficult
for homeowners to buy properties any longer. And it’s also because basically
the time has elapsed now for a lot of these
different banks have gotten past
that period now. So they’re is not carrying
foreclosures on their books anymore, which is great news. We’ve really turned a corner. So when people say we’re
in the middle of a bubble, I say, where? Where is this bubble
you’re talking about? Is it San Francisco maybe? I don’t know. Is it is it New York City? I don’t know. It’s certainly not
where I invest, I’ll tell you that much. So if the borrower pays
off this default, though, during this
pre-foreclosure phase– so if they pay it off, if they
get back up into good standing, then the foreclosure ends. And then the borrower
avoids eviction and a sale of the property. But if that default
is not paid off, then the foreclosure continues. So in that window
of 60 days, there may be an opportunity for you to
pay this thing off and get back in good standing. And then the foreclosure
process goes away. And it’s difficult for
a bank, because they’re going to have to pay
interest on it too. So you haven’t paid
for six months, you have to pay everything
you owe plus all the interest as well to go back and
pay all of that as well. So not only you have to go
back and pay what you owe, you have to pay the
interest on it as well. But that resets the clock. And now you’re back
in good standing. And you could start
the whole process over again if you had to
as a foreclosure process. Number four is if
the default is not remedied by the
prescribed deadline, then we go to auction. So step four is the
auction, dun, dun, dun. And basically the lender or
the bank’s representative will set a date for the home
to be sold at a share of sale or a foreclosure auction. And the notice of
trustee sale, it’s recorded at the county
recorder’s office. And they’ll have to
deliver notifications to people all around the
neighborhood, public notice. And they have to put
in the newspaper. Sometimes they put on the radio. They have to do all
of those things. Auctions can be held on the
county courthouse steps– I bought tons of properties
at auction over the year– or a convention center
or some public place. In many states, the borrower
has the right of redemption. So if you are the
forclosee, you own the home and you’re scrapping to get
all your money together, you have the right
to go to that auction as the right of redemption
and say, look, I got all my money together. Take this property off auction. I’m here. I’m buying it back. I’m all good. We’re all good. So at auction, the home
is sold to the highest bidder for a cash payment. But because the
pool of buyers there who can afford to pay cash
on the spot for a house is limited, many lenders make
an agreement with the borrower called a deed in
lieu of foreclosure to take the property back
or the bank buys it back at the auction. So you may be able to
have an opportunity to work with the bank
even up until the point of the auction, which is great. And step five is the
post-foreclosure– step five, post-foreclosure process. So if a third party does
not purchase the property at the foreclosure
auction, then the lender takes ownership of it. Again, the bank
does not want to be in the ownership of property. Then it’s known as an REO. If you’ve heard
of REO properties, that’s what this is. The bank is now the
Real Estate Owned. REO means real estate
owned by the bank. And it kind of enters this
weird sort of black hole. It’s a pain in the butt dealing
with REOs, dealing with banks. Again, they’re not good
at owning properties. They’re kind of terrible
at it, actually. So when it gets to
this process, they’re pretty terrible at holding
and owning these properties. And they’re not good at
selling them, to be honest. And it’s a pain in the
butt for investors to get their hands on these as well. So bank-owned properties
are sold in one of two ways. Most often, they’re listed
by a local real estate agent, who is an REO agent. So specifically, there may be
a few REO agents in your area who get these properties. So you’re interested in
trying to buy one of those, reach out to a local REO agent
and make that connection. They do not like to be
fooled around with, though. Typically, they have their
investors they work with. And they don’t
like tire kickers. So if you are just kind of
kicking tires and thinking about buying these properties
from these real estate agents at a discounted price,
they don’t like to fool around. They know who their
investors are. And their investors
bring cash to the table. And they do not fool around. And they have to
close very quickly. So they’re listed by
a local real estate agent on the open
market or you can have– like, Zillow and other places
will list bank-owned properties on their websites as well. So bank-owned auction properties
at the liquidation auction, they’re often held in auction
houses or convention centers. So you can go to auction.com. Or Zillow will have some
of these REO properties as well listed there. Usually, they have to
be funneled, though, through an REO agent who’s
listing that property– so a couple of ways to deal with
the post-foreclosure process. But there it is a nutshell. That’s how a foreclosure works. It can be a little scary. But it’s also a great
way to pick up properties if you come across foreclosures
and they’re available. You want to do your
due diligence on it. Because chances are, it’s been
sitting there for a long time. It’s going to need
a lot of repair. It might not have been
winterized properly, pipes burst. You could have a lot of issues
with foreclosed properties. But they are few and
far between these days, which is also good news for the
health of the housing economy. I’m Clayton Morris. If you have any
questions about this, I’d love to hear your comments,
thoughts, concerns, questions about real estate investing. And if you’re ready to
book a call with our team, that’s what we do all day long. We help investors get
rental properties. We take care of it soup to nuts. And if you’re ready to check
it out, please, come on over to our website and see
what we have to offer. Book a call with our team. And we do it all for
you, soup to nuts. We find the property. We rehab the property. We sell you the property, place
a great tenant in the property. And you don’t have
to do anything. So check us out. Come over to
morrisinvest.com And we’d be happy to help you jump on
the phone and talk with you. Until next time, everyone,
now go out there, take action, become a real estate investor. We’ll see you next time on The
Investing in Real Estate Show. Bye, everyone.

17 thoughts on “Foreclosure Process

  • When prices rise above what is affordable and people need FHA 3.5% down I would consider that asset distortion and Fed funds rates being held down is added evidence in my opinion.

    What do you think? Thanks for the great video!

  • Isn't debt forgiveness counted as taxable income? So let's say the bank forgives $50,000 of a loan the person may get hit with a $10,000 or s tax bill.

  • Big fan of you and the Mrs. I have watched you and Natali on Tech TV with Leo and actually have been a fan of Natali even further back when she was a semi regular with John C. Dvorak. I have watched how the both of you have built a business on your Ideas and things that excite you. Keep putting your ideas out here for us to watch. I'm an old fart like John C. and set in my ways and old enough that I don't have to take crap off anyone. LOL. I'm 66 and still working with my business as a FedEx Ground linehaul contractor and a Amazon Transportation contractor. Love the energy that you put in your shows. Keep up the good work.

  • I agree with being a natural for YouTube. Wish you had a bit more of a following, but figure REI isn't a common topic to look into lol. If you ever wanted a much larger following I feel some basic money math videos would be good. Eg: budget, debt, etc

  • Hey clayton, interesting subject. Your sound on this video went a little weired Clayton, wind maybe Clayton? or audio problems?

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